Legislature(2023 - 2024)ADAMS 519
05/02/2024 10:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB196 | |
| HB223 | |
| HB119 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 187 | TELECONFERENCED | |
| + | SB 74 | TELECONFERENCED | |
| + | SB 75 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 196 | TELECONFERENCED | |
| += | HB 223 | TELECONFERENCED | |
| += | HB 119 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
May 2, 2024
4:11 p.m.
4:11:40 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 4:11 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Representative Genevieve Mina; Courtney Enright,
Legislative Liaison, Department of Health; Katy Giorgio,
Staff, Representative Genevieve Mina; Representative George
Rauscher, Sponsor; John Crowther, Deputy Commissioner,
Department of Natural Resources; Derek Nottingham,
Director, Division of Oil and Gas, Department of Natural
Resources; Craig Valdez, Staff, Representative George
Rauscher; John Boyle, Commissioner, Department of Natural
Resources; Clark Bickford, Staff, Representative Jesse
Sumner; Brodie Anderson, Staff, Representative Neal Foster;
Representative Jesse Sumner, Sponsor; Cody Rice, Staff,
House Majority; Representative Tom McKay.
PRESENT VIA TELECONFERENCE
Deb Etheridge, Director, Division of Public Assistance,
Department of Health; Brandon Spanos, Acting Director, Tax
Division, Department of Revenue; Brandon Brefsczynski,
Deputy Director, Alaska Industrial Development and Export
Authority; Emily Nauman, Director, Legislative Legal
Services; Brandon Spanos, Acting Director, Tax Division,
Department of Revenue; Josephine Stern, Assistant
Commissioner, Department of Health; Brandon Emmett,
Chairman, Governor's Tax Task Force on Recreational
Marijuana and Hemp; Teri West, Administrative Services
Director, Department of Corrections; Leslie Isaacs,
Legislative Liaison, Department of Administration; Pam
Halloran, Administrative Services Director, Department of
Public Safety; Joan Wilson, Director, Alcohol and Marijuana
Control Office, Department of Commerce, Community and
Economic Development.
SUMMARY
HB 119 MARIJUANA TAX
CSHB 119(L&C) was REPORTED out of committee with
seven "do pass" recommendations, two "amend"
recommendations, and one "no recommendation"
recommendation and with seven new fiscal impact
notes from the Department of Corrections, three
new fiscal impact notes from the Department of
Health, one new fiscal impact note from the
Department of Public Safety, one new fiscal
impact note from the Department of Revenue, and
one previously published zero note: FN1 (ADM).
HB 196 FOOD STAMP PROGRAM ELIGIBILTY
HB 196 was HEARD and HELD in committee for
further consideration.
CSHB 223(FIN)
TAX & ROYALTY FOR CERTAIN GAS
CSHB 223 (FIN) was HEARD and HELD in committee
for further consideration.
CSSB 74(FIN)
PHYSICAL THERAPY LICENSURE COMPACT
CSSB 74(FIN)a was HEARD and HELD in committee for
further consideration.
CSSB 75(FIN)
AUD. & SPEECH-LANG INTERSTATE COMPACT
CSSB 75(FIN)a was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the meeting agenda. He explained
that the committee would hear the bills it did not address
in the previous meeting. The current meeting was scheduled
to begin at 10:00 a.m. and the committee had scheduled an
additional meeting that was set to begin at 1:30 p.m.
4:14:13 PM
Co-Chair Edgmon implored the committee to be as brief as
possible considering the lengthy agenda and late hour of
the day.
Co-Chair Foster agreed with the sentiments.
Representative Hannan asked for clarification on which
bills were scheduled for the 1:30 p.m. meeting.
Co-Chair Foster replied that HB 232 and SB 104 were
scheduled.
Representative Hannan asked if the committee had already
heard SB 104.
Co-Chair Foster responded that SB 104 had not been heard
but the committee had heard the House companion bill.
Representative Hannan commented that some bills required
longer discussions than others.
Co-Chair Foster agreed and noted that some of the bills on
the agenda had many amendments and others were first
hearings.
Co-Chair Foster noted that Representative Genevieve Mina
was in the audience.
4:16:59 PM
HOUSE BILL NO. 196
"An Act relating to the supplemental nutrition
assistance program; and providing for an effective
date."
Co-Chair Foster relayed that the committee would hear
fiscal notes for the bill.
4:17:26 PM
COURTNEY ENRIGHT, LEGISLATIVE LIAISON, DEPARTMENT OF
HEALTH, went through the fiscal impact note by the
Department of Health (DOH) with control code OVeDm. The
fiscal note stated that the addition of a new position
within DOH would cost $138,000 in the initial year and
$135,000 in subsequent years. She explained that half of
the funding would come from federal receipts and half would
come from the general fund. The department recognized that
implementing the broad-based categorical eligibility had
many additional requirements for compliance, largely
associated with the dual eligibility with the Temporary
Assistance for Needy Families (TANF), which would
necessitate an additional employee.
Representative Stapp understood that previous testifiers
had stated that the bill would save the department money,
but he did not see the savings reflected in the fiscal
note. He asked why the existing quality control employee
would not simply take on the new duties required by the
bill.
Ms. Enright deferred the question to her colleague.
4:19:04 PM
DEB ETHERIDGE, DIRECTOR, DIVISION OF PUBLIC ASSISTANCE,
DEPARTMENT OF HEALTH (via teleconference), replied that the
fiscal notes reflected non-cash TANF benefits, for which
DOH was responsible. She noted that there was an obvious
deficit and the Division of Public Assistance (DPS)
experienced internal struggles around its internal case
review. The division was requesting an additional position
to ensure that it could effectively administer the food
TANF program.
Representative Stapp asked if it was the department's view
that the bill would save time. The fiscal note stated that
households must complete a staff application, interview,
provide financial processes, report documents, and reapply
regularly. He asked whether the department anticipated any
changes in productivity due to the expected increased
volume. He did not see any information in the fiscal note
that stated that the number of eligibility technicians
would be decreased.
Ms. Etheridge responded that the fiscal note did not
reflect the delays and additional work required to do a
verification of assets. The Division of Public Assistance
(DPA) would often need to "pend" the cases, which meant
that the case would need to be reevaluated when additional
information was available. The division sometimes received
partial information, which meant the case had to be pended
for a longer period of time. The process was more time-
consuming when the department had to complete verification
requests for assets. She explained that removing the asset
requirement helped the division process cases faster. The
division anticipated receiving additional applications for
the Supplemental Nutrition Assistance Program (SNAP)
because the federal poverty level (FPL) would increase,
which would increase the number of individuals who were
eligible for benefits.
Representative Stapp understood that on top of the FPL was
the 200 percent requirement broad-based category
eligibility. He asked if the percentage could be altered.
Ms. Etheridge responded that 200 percent was the
requirement. She would confirm the information.
4:22:52 PM
Representative Hannan asked if there would be a decline in
benefits if an individual increased their FPL.
Ms. Etheridge responded in the affirmative. She had
recently testified on the boundaries of the eligibility
requirements. As an individual's income increased, the
benefits decreased.
Representative Hannan recalled that one level of benefits
might be $36 a month, which would mean that an individual
who was at the 200 percent above poverty eligibility level
might receive less than $50 in benefits.
Ms. Etheridge replied that $36 was the amount for a single
individual in an urban area. There were three categories of
eligibility: urban, rural one, and rural two.
4:24:21 PM
KATY GIORGIO, STAFF, REPRESENTATIVE GENEVIEVE MINA,
responded that 200 percent was not a requirement, and a
different number could be chosen. There were a range of
upper poverty limits that states used and the federal
government allowed Alaska to independently shape its SNAP
program. She noted that most states had chosen 200 percent.
Representative Galvin understood that 42 states had decided
on 200 percent. She asked if she was correct.
Ms. Giorgio responded that she had a chart from the United
States Department of Agriculture (USDA) that detailed the
specifics for each state. She relayed that 42 states and
territories had adopted broad-based categorical eligibility
in some form. Every state administered the program slightly
differently.
Ms. Enright relayed that there was an additional fiscal
impact note from DOH with the control code vOQPI. The
fiscal note detailed that an additional position would cost
an initial $141,000 and would cost $138,000 in subsequent
fiscal years. The cost would be split equally between
federal receipts and a general fund match. The position
would be in the training unit and would help integrate the
categorical eligibility category into the suite of other
assistance programs.
4:26:56 PM
Representative Galvin asked if there had been any work done
to ascertain how much extra money would be coming into the
state through the grocery stores that would be seeing a lot
more traffic. She understood that people would be going
into grocery stores instead of food banks. She asked if
there had been any research on the potential impacts.
Ms. Enright responded that the department did not have an
estimate, but she would follow up.
Ms. Giorgio responded that she did not have an estimate as
to how many SNAP dollars might flow into Alaska, but every
SNAP dollar in Alaska generated about $1.70 in economic
activity. She relayed that there were a high number of SNAP
recipients predominantly in rural areas and the SNAP
dollars were spent in local grocery stores, which had
downstream effects on the local economy. She viewed SNAP as
an economic driver.
Representative Galvin asked how many dollars were currently
spent through SNAP.
Ms. Giorgio did not have the information.
Ms. Enright also did not have the information.
Representative Galvin asked the if total spend was $1
million or $2 million or was it in the tens of millions.
Ms. Etheridge responded that she did not have the
information forecasted within DPA, but she could follow up
with an estimate. She explained that the program was a
federal pass-through benefit.
4:29:24 PM
Representative Stapp asked why the fiscal note indicated
that the employee would be needed through 2030 if the
program only required a temporary change in the software.
Ms. Enright responded that turnover was normal for many
departments, and she wanted the fiscal note to reflect the
expectation that new employees would continue to train on
the broad-based categorical eligibility for many years into
the future.
Representative Stapp assumed that the division had to train
employees already and wondered why another employee needed
to be added for training purposes.
Ms. Etheridge responded that the role included non-cast
TANF benefits-related duties. The work was provided to
individuals who were receiving or eligible for broad-based
categorical eligibility. The work could include brochures
or training. There was an entire body of work that was
associated with the implementation of broad-based
categorical eligibility and the new employee would be
tasked with the work.
Representative Stapp commented that he kept hearing that
there was significant work that would need to be done if
the bill were to pass.
Representative Tomaszewski noted that the commodities line
in the fiscal note showed a $4,000 appropriation in FY 25,
but in the analysis, it was referred to as a $40,000
appropriation. He asked if it was $4,000 or $40,000.
Ms. Enright responded that it was a typo and it was meant
to be $4,000 and not $40,000.
Representative Tomaszewski asked if the federal poverty
guidelines spreadsheet had been distributed to committee
members.
Ms. Giorgio responded that she sent the spreadsheet to
committee staff in the morning, but she would follow up to
make sure it was distributed.
4:33:03 PM
Co-Chair Foster set an amendment deadline for Tuesday, May
7 at 5:00 p.m.
HB 196 was HEARD and HELD in committee for further
consideration.
4:33:20 PM
CS for HOUSE BILL NO. 223 (FIN)
"An Act relating to royalty rates and payments for
certain oil and gas; and providing for an effective
date."
Co-Chair Foster relayed that the committee would review the
two fiscal notes and then proceed to amendments.
REPRESENTATIVE GEORGE RAUSCHER, SPONSOR, offered an
overview of HB 223. He explained that the bill represented
a crucial step in revitalizing Alaska's critical natural
gas industry in the Cook Inlet sedimentary basin and was a
legislative response to the impending natural gas
availability shortage. The bill addressed a longstanding
barrier to new investment and production. By proposing
strategic modifications to the royalty rates, HB 223 aimed
to elevate Alaska's competitiveness and attractiveness for
natural gas investments in an underutilized field.
4:35:12 PM
BRANDON SPANOS, ACTING DIRECTOR, TAX DIVISION, DEPARTMENT
OF REVENUE (via teleconference), reviewed the new
indeterminate fiscal note with control code lgkbj from the
Department of Revenue (DOR). There were no direct changes
to taxes. The revenue impact of the fiscal note was limited
to the oil and gas production tax administered by the Tax
Division, and the most significant impact on state revenue
would be the royalties collected by the Department of
Natural Resources (DNR). Based on DNR's Spring 2024 Revenue
Forecast, oil production would qualify for royalty
reduction and a share of gas production might also qualify.
He explained that qualifying gas production represented
wells that were expected to be drilled after July 1, 2024,
to meet existing gas contracts. Production tax revenue was
impacted because the production tax applied to taxable oil
and gas was calculated after subtracting royalties. With
reduced royalties, a slightly higher quantity of gas would
be taxable.
Mr. Spanos continued that the production tax for gas in the
Cook Inlet was 13 percent of gross value with a per
thousand cubic feet (MCF) tax ceiling of 17.7 cents per
taxable MCF for new fields and an average of 15.9 cents per
taxable MCF for existing fields. The revenue impact of the
bill was shown as indeterminate because it was not possible
to precisely determine the volume of gas that would qualify
for royalty relief under the existing forecast or the
volume of new oil and gas that might be incentivized
through the bill. Based on the Spring 2020 Revenue
Forecast, there would likely be production tax increases of
several hundred thousand dollars with no changes to company
behavior or investment. If additional production and
investment occurred, the tax impact would be greater and
could bring about increased property tax and corporate
income tax. There would be no additional cost for DOR to
administer the bill because there were no direct impact
changes.
Representative Josephson noted that earlier in the session,
a bill sponsored by the governor which would request a
relief for new production down to 5 percent was released.
He had asked previously what the annual royalty was that
the state received from Cook Inlet, and he found out it was
$40 million. He had also asked if there was any way to
estimate what the impact on royalties would be under the
bill.
Mr. Spanos deferred the question to DNR.
4:39:25 PM
JOHN CROWTHER, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, asked Representative Josephson to restate the
question.
Representative Josephson restated the question.
Mr. Crowther responded that he understood that DNR had
already provided the information to the committee. If the
legislation functioned as intended and brought gas to
market, the result would be a net revenue to the state, not
a net royalty to the state. The state would continue to
receive the royalty from the existing production, and the
status quo curve would continue to come to the state
directly from the royalty. If the projects did not come
online, DNR anticipated minor reductions in royalty in out
years because a small portion of the projects might
qualify. The department would not expect to see material
reductions to royalties, even if the bill was not
successful in bringing more production online.
4:41:50 PM
DEREK NOTTINGHAM, DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, reviewed the zero fiscal
impact note with control code gemhR from DNR. The
department was not adding any costs to the system in the
application of the royalty modification. There were no new
positions. The department would need to formulate
regulations and the analysis reflected Mr. Crowther's
response to the previous question.
Representative Ortiz asked for a definition of certain oil
and gas under the bill.
4:44:02 PM
CRAIG VALDEZ, STAFF, REPRESENTATIVE GEORGE RAUSCHER, asked
what part of the bill Representative Ortiz was questioning.
Representative Ortiz responded that he was looking at the
title of the bill.
Mr. Valdez responded that the title was slightly amended in
the House Resources Committee. He explained that the
definition of certain oil and gas was on page 2, line 2 of
the bill. Qualified new gas meant gas produced under
subsections (A), (B), and (C).
Representative Hannan asked whether the legislative
consultants on oil and gas had been involved in the
dialogue or had been briefed by the House Energy Committee
or House Resources Committee on the potential impacts of
the bill.
Mr. Valdez responded that the consultants were currently
working on determining the potential impacts.
Representative Rauscher responded that the consultants were
new and were hired within the last two weeks and were
currently working on models of the potential impacts of the
bill. The consultants had not yet produced anything
tangible, but the work was being done.
Representative Hannan asked if any oil and gas consulting
firms had advised the legislature on the bill or if the
guidance was strictly from industry participants and state
agencies to develop a tax recommendation.
Mr. Valdez responded that DNR had provided the modeling
regarding the department's outlook in previous
presentations.
4:47:28 PM
Representative Galvin asked which resources were used to
prepare advice for the tax structure.
Mr. Crowther responded that DNR had assisted the sponsor of
the bill and the team that administered the existing
royalty program was involved in crafting the
recommendations. He explained that DNR was responsible for
promoting the maximum use and development of state
resources and collecting and administering royalties. The
team had intimate knowledge of the function of the current
system, the current state of development, and how changes
to the royalty structure would affect the development
paradigm. He explained that DNR had an entire section of
subsurface professional experts and commercial professional
experts.
Representative Galvin asked if Mr. Crowther would agree
that when there had been changes in tax structures in the
past, the department had typically engaged outside analysts
to help consult and provide a more global perspective.
Mr. Crowther replied that the department had extensive
expertise with royalty provisions. The legislation was
limited to royalties and not changes to the Cook Inlet tax
structure. He was confident in the department's in-house
expertise on royalties.
4:49:28 PM
AT EASE
4:49:48 PM
RECONVENED
Co-Chair Foster moved to the amendment process.
Representative Stapp MOVED to ADOPT Amendment 1, 33-
LS0886\D.2 (Nauman, 4/24/24) (copy on file):
Page 1, line 7:
Delete "in the Cook Inlet sedimentary basin"
Inse1t "for land south of 68 degrees North latitude"
Page l, line 14:
Delete "the Cook Inlet sedimentary basin
Insert "land south of 68 degrees North latitude"
Co-Chair Foster OBJECTED for discussion.
Representative Stapp explained that the amendment had
appeared in a different variation of the bill. The
amendment was called the "Middle Earth" amendment and would
not only apply to Cook Inlet, but to the area in between
North Slope oil and gas reserves, as well as to the Cook
Inlet Basin, which was referred to as Middle Earth.
Representative Rauscher supported the amendment. He
explained that the original version of the bill included
Middle Earth language. He supported the idea of the
amendment in the past as well.
Representative Hannan asked if the sponsor of the amendment
looked at 38 degrees North latitude and to the far west
areas of Alaska as well. She understood that Representative
Stapp was referring to Fairbanks when he mentioned Middle
Earth, but she thought Chuckchi Seas offshore oil and gas
development would be mainly below 38 degrees North
latitude.
Representative Stapp responded that Middle Earth was not
just Fairbanks, but anything from the Fairbanks degree of
latitude. He did not think that the amendment would cause
zero royalties to be given for offshore drilling in the
Chuckchi Sea as similar language as the language in the
amendment was already commonly used.
Mr. Valdez responded that page 1, lines 11 through 14 of
the bill indicated that the amendment would still be
subject to the same rules. If there was any commercial
production and exploration that was then exported for
revenue, the amendment would be covered under the same
provisions as well.
Representative Josephson understood that thousands of
people in Fairbanks received natural gas and the amendment
maker intended to build out the same process for both cost
benefits and clean air benefits. He asked if the point of
the amendment was to build pipelines to the source of gas
in the event that gas in commercially producible quantities
was found in the interior.
Representative Stapp responded that he had another
amendment referencing Representative Josephson's
understanding of his point. The amendment simply borrowed
language within another variation of another energy bill
and inserted it into the bill at hand. He noted that there
were currently no active developments on state land of oil
and gas in Middle Earth. He was trying to look at all
potential opportunities to solve the Cook Inlet gas crisis.
He was not overly optimistic that including Middle Earth in
the bill would bring about a positive result, but he
thought it was an important strategy to explore.
4:54:59 PM
Co-Chair Johnson asked why the royalty would be changed if
there was little optimism about the change producing a
positive result. She was reluctant to give up royalties
without a clear reason.
Co-Chair Foster WITHDREW the OBJECTION.
Representative Hannan OBJECTED.
4:56:04 PM
A roll call vote was taken on the motion to adopt Amendment
1.
IN FAVOR: Coulombe, Tomaszewski, Cronk, Ortiz, Josephson,
Foster, Stapp, Galvin
OPPOSED: Hannan, Johnson, Edgmon
The MOTION PASSED (8/3). There being NO further OBJECTION,
Amendment 1 was ADOPTED.
4:57:06 PM
Representative Coulombe WITHDREW Amendment 2 (copy on
file).
4:57:14 PM
Representative Josephson MOVED to ADOPT Amendment 3, 33-
LS0886\D.14 (Nauman, 4/26/24) (copy on file):
Page 1, line 7:
Delete "zero"
Insert "6.25"
Page 2, line 2, following the second occurrence of
"gas":
Insert "offered for sale to an electric or
heating utility before being offered for sale to
another person that is"
Co-Chair Foster OBJECTED for discussion.
Representative Josephson explained that the amendment would
remove the zero royalty. He had read a memo on the subject
and there was a 1987 decision called Trustees versus State
which essentially said that in most circumstances, taking 0
percent royalty was not allowable. The amendment suggested
taking a 6.25 percent royalty instead, which was half of
the traditional royalty. Some fields on the North Slope had
over 16 percent royalty, but generally, the rest of the
country had moved beyond the standard 12.5 percent royalty
rate. The amendment would generously cut the royalty in
half. The amendment also acknowledged that the purpose of
royalty relief was to fix the Cook Inlet "crisis" and would
offer a break when gas produced from a new field was sold
to a heating or electric utility.
4:59:25 PM
Representative Stapp thought that the point of the bill was
to make the costs input for production in Cook Inlet as
close to free as possible. He agreed that the 6.25 percent
royalty idea would be less expensive, and he would be
amenable to the idea. He would defer details to legislators
from Anchorage and South Central because he did not want to
potentially disrupt and worsen the situation.
Representative Cronk did not live in Anchorage but wanted
to help individuals who lived in Anchorage. He would be
satisfied with a 0 percent tax, but he would also support a
higher tax.
Mr. Valdez commented that a portion of the amendment was in
the original version of HB 223, but through consulting with
DNR and oil and gas experts, it was discovered that it
would be nearly impossible to track molecules of gas once
the molecules entered a common carrier pipeline. He argued
that it would create more uncertainty and disincentivize
investment. The oil was in Cook Inlet, but producers were
facing financial disincentives to pursue the oil. He had
consulted with DNR and the department asserted that 6.25
percent was too high to shift the economics of the gas
products most likely to deliver immediate long-term
results. He explained that lower rates brought about
greater economic shifts and made it easier to generate the
desired additional production. He understood that the main
focus of the bill was to increase production in Cook Inlet
to proprietary gas for electricity and heating to
Southcentral Alaska. All gas produced would be used by
citizens of the state, which was why he thought a 0 percent
rate made sense as it would maximize the results for
Alaskans.
Representative Josephson understood that the bill as
written stated that if a droplet of oil was produced in a
new location, the producer would lose all potential relief.
He did not understand how the bill would help the Cook
Inlet crisis if producers could ship oil out of the state
and still receive relief.
Mr. Valdez asked Representative Josephson to rephrase the
question. He understood that if the bill were to pass as
written, oil that was produced in the Cook Inlet and
shipped out of state would not be eligible for royalty
relief. There was a future amendment that would address a
language change to include a particular lessee or the basin
as a whole as well.
Representative Josephson had no further comments.
5:04:43 PM
Representative Galvin supported the amendment because she
thought it offered some relief to developers. She asked if
6.25 percent was undoubtedly the correct percentage. She
asked if DNR still had the discretion to reduce the
percentage.
Mr. Valdez responded that there was a requirement for a
multi-year effort to evaluate the possibility reducing the
rates. The legislature would have about one year to decide
whether there would be implications of Alaska liquified
natural gas (LNG) increasing costs for Cook Inlet. The bill
would help create certainty and allow more time for
decision-making.
Representative Galvin understood that the projects all took
years to be completed and that each gas company was doing
independent modeling to determine economic viability. If
there were any issues, the companies would have years of
accounting to share with DNR and be able to explain why a
change in royalty was needed. She presumed that investors
would want to receive constant updates on the companies'
activities. She did not want to take away power from the
department because it was important for Alaskans to have
the gas necessary to keep warm. She stressed that there was
a larger context and that the DNR commissioner had the
power to change the royalty percentage when it was needed.
She thought the structure already allowed for companies to
show accounting data to the commissioner only and not to
the public.
Mr. Valdez responded that producers of gas were not the
only party responsible for making decisions; buyers of gas
were equally involved in the decision-making process.
Representative Hannan returned to the topic of the proposed
addition in the amendment of language relating to gas being
offered for sale to an electric or heating utility before a
person. In response to Representative Josephson, Mr. Valdez
had noted that the original version of the bill included a
similar line and that the concern was that once the gas was
in a common carrier, there was no way to know to which
entity it was sold. She could think of many industrial
clients who would be willing to pay more than a local
utility. She understood that DNR suggested that it would be
too difficult to track gas sales in such a way and that the
language should be removed from the bill. She acknowledged
the difference between providing gas to utilities versus
industrial users who might be willing to pay more, yet
still allowing the industrial user to receive all the
foregone royalty revenue from the state, especially when
the gas might be entirely used for private sector purposes.
5:10:00 PM
Mr. Valdez responded that the only current buyers of
natural gas in Alaska were utilities. He thought that
Representative Hannan's hypothetical was possible, but
highly unlikely due to the billions of dollars required to
build a pipeline, invest in gas offshoots, and build the
required infrastructure. The cost of a natural gas pipeline
from the North Slope was around $40 billion. Moving gas was
an expensive proposition and it would be difficult to take
the hypothetical to the extreme without modeling.
Representative Hannan wondered if gas produced in Cook
Inlet near a formerly functional fertilizer plant that had
an existing pipeline and structure to take in gas would be
enticing to a potential client. The gas would be cheap to
purchase because there would be no royalty.
Mr. Valdez responded that it was hypothetically possible
but from his understanding, the utilities were the only
current buyers.
Representative Hannan argued that if the utilities were the
only buyers, then there was no harm in including the
amendment language in the bill.
Representative Rauscher commented that he had to go to
another meeting but his staff would stay.
Representative Ortiz commented that the amendment
illustrated a primary problem because the bill was brought
before the committee without any outside consultation on
its potential impacts. He did not know if it made sense to
give gas production companies a zero royalty or if a
royalty was the reason why the state did not have more
production in the Cook Inlet. If the royalty was the
reason, he wanted to hear confirmation from an outside
source that Alaska was charging outrageous royalties and
there would be more production if the royalties were
lowered. Due to the lateness of the hour and the lateness
of the date, he thought it was unlikely that there would be
such a confirmation, and he thought the assertions made in
the bill were a reach. He thought there should be more
consideration if Alaska was planning on giving away its gas
with no royalties. Before the state made a decision, it
should hear some clear, outside, independent
recommendations.
5:14:08 PM
Co-Chair Edgmon did not think there was a formal analysis
of casualties and change in behavior. He noted that the
Alaska Gasline Development Corporation (AGDC) was about to
make an important announcement that the company was going
to implement a pipeline from the North Slope that might be
able to sustain Cook Inlet for a long time. He wondered if
building long-term contracts or a long-term debt would be
palatable if the royalty was split in half. Cutting the
royalty in half was generous and to implement a zero
royalty would be excessive. He wondered if the legislature
was giving away more than was necessary. He supported the
underlying bill but thought that zeroing out the royalty
was excessively generous and he did not think that choices
were being made based on analysis.
Representative Josephson noted that Representative Cronk
had talked about taxes, but the issue at hand was
royalties. Royalties were different than taxes, which was
described in a memo the committee had received previously
from Emily Nauman from Legislative Legal Services (LLS). He
stressed that the state could not implement a 0 percent
royalty or it could be sued. The governor suggested a 5
percent royalty and the amendment proposed 6.25 percent,
which was not significantly different. He recalled that the
committee had heard testimony indicating that there were a
few overriding interests. He wondered if moving from 25
percent total royalty to 12.5 percent would make the system
economical. The original draft of the bill stated that the
relief was intended to help make it easier for the gas in
Alaska to be sold to Alaskan utilities, which he thought
was the correct strategy.
Co-Chair Foster MAINTAINED his OBJECTION.
Representative Cronk commented that Alaska's market was
small and he could not imagine drilling million-dollar
wells and expecting to make a profit when there was a
crisis.
Co-Chair Johnson stated that she did not have a problem
with tax relief or incentives. She thought that royalty
share was a different matter than taxes. Royalties took
care of the state and taxes did not. She struggled with the
idea of reducing royalties to zero.
Representative Coulombe commented that it was an
interesting conversation because the desire for modeling
seemed sudden. She was surprised by her colleagues in
Anchorage because it was a known fact that more gas was
needed. She thought it was more valuable to have a warm
home than for the state to have more money. Reducing the
cost of production was a strong incentive. She was in
opposition to the amendment but appreciated the work that
went into it.
Representative Galvin agreed that it was a critical issue.
When a 5 percent royalty was reduced to 0 percent, there
needed to be a complete understanding of why it was
reduced. The cost of drilling would make it easier for
industry but it was a complicated question and typically,
the processing time was extensive. The question was how to
distribute more oil and gas to Alaskans. She acknowledged
that she was not an expert and she appreciated DNR's work.
She thought that significant fiscal changes should come
with more consternation. The commissioner already had the
discretion to make changes and she wondered why the bill
was brought forth at the present moment.
5:23:57 PM
Representative Coulombe responded that she did not want to
tell her constituents that she wanted to look into the
business's books before offering royalty relief. From the
perspective of a constituent, private business
confidentiality was unimportant and constituents simply
cared about prices and availability.
Representative Tomaszewski commented that he would not be
directly impacted by the bill because Fairbanks did not
have natural gas. He saw the bill as a way to prevent
Southcentral from needing to turn the thermostats down
again due to gas issues. There might be more cold winters
in the future of the state. He was in opposition to the
amendment because he supported his fellow Alaskans who
lived in Southcentral and needed the gas.
Co-Chair Johnson noted that she had heard that royalties
could be reduced to zero and it would not make any
difference in the production or drilling of new gas. She
understood that it would still not be economically
feasible. She wanted to think about the situation five
years and ten years in the future. The state had resources
and it was important to maximize the resources. She
appreciated the original bill and the suggestion to reduce
the royalty percentage, but she did not think there was a
reason to expand the area so significantly. Reducing the
royalty down to zero would be a significant policy change
and there needed to be more thought and discussion on the
subject. She asked if the commissioner could offer his
perspective.
5:28:45 PM
JOHN BOYLE, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
remarked that he appreciated the discussion. The
perspective of the department was that time was not in the
state's favor. Based on projections, the state would have a
shortfall between the amount of gas that was produced and
the amount of gas demanded by utilities. Action needed to
be taken as utility rates would triple or quadruple if
nothing was done, and emergency shipments of gas would need
to be brought in to help fill the supply gap. The
discussions about royalties were similar to the discussions
concerning where the gas might go. Natural gas prices were
currently around $9 per thousand cubic feet (MCF) while
natural gas prices in the continental U.S. were around
$1.60 MCF. The state currently had expensive and
uncompetitive gas. He thought that Cook Inlet strategies
were not focused on the far future of production, but on
the near future in order to make a play for time. He
stressed that it was important to squeeze enough gas out of
the inlet to avoid expensive imports of natural gas while
working on the next pieces of the energy puzzle. The
utilities in the state had made it clear that more gas was
needed and it was likely that the price of gas would
increase. He believed that the risk of gas being exported
elsewhere was minimal.
Commissioner Boyle continued that he respected Co-Chair
Johnson's comments on royalty because DNR understood how
important it was that the state received its share of
resources. One of the reasons royalty relief was more
impactful than standard tax relief was that royalty
payments impacted company cash flows differently than
severance taxes. Royalty payments were paid in gross,
meaning that a company had to pay its royalty share
regardless of whether it was making a profit on the oil and
gas it produced. He explained that companies not operating
in a cash-flow-effective manner still had to pay royalties,
which had a significant impact on the overall economics of
the project.
Commissioner Boyle explained that companies also had to
start paying royalties immediately upon beginning
production and the cash flow impact of royalties was
immediately apparent, which was different from severance
tax which might allow some flexibility in terms of the
number of payments a company needed to make. He stressed
that investment choices were the most impactful decisions
companies could make. He noted that DNR had modeled
scenarios and had shared much of the modeling with the
committee. The department was confident that a low royalty
rate was the most appropriate and would incentivize more
production, particularly in the short term, which was
desperately needed. He thought that the department would be
amenable if the committee were to contemplate a royalty
rate that was de minimis and above zero; however, there was
a significant enough difference between a 1 percent royalty
and a 6.25 percent royalty to see an impact on the
potential for development of additional oil and gas
deposits.
Commissioner Boyle remarked that companies were not
clamoring to invest in Cook Inlet and the lease sales in
the inlet received tepid responses. He thought it was
indicative that the current fiscal structure was not
conducive to fostering investment or attracting new
entrants. He did not think the state could expect to see
more production that would alleviate the upcoming gas
shortage without some significant changes. He concluded
that the department would not support the amendment.
5:36:51 PM
Co-Chair Foster noted that the amendment was the crux of
the bill and he was receptive to the continuation of the
discussion.
Representative Josephson understood that the focus was on
the near future because the state needed to find new
solutions. He assumed that Commissioner Boyle would support
putting a sunset on the relief and asked if it was a fair
implication.
Commissioner Boyle responded that he would agree that the
focus was on increasing energy in the short term. He
explained that whether he would support a sunset would
depend on the details of the sunset. A potential investor
might not think there would be a return on their investment
in Alaska with the current royalty rate and tax structure.
If the state lowered the royalty rates to become more
enticing for potential investors but the return window was
too short, investors might continue to be dissuaded. He
thought that a short sunset window would provide relief for
a while, but oil and gas projects were generally designed
to be longer-term. He was cautious of a sunset that was too
short and his support of it would depend on the terms of
the sunset.
Representative Josephson noted that the administration had
a bill that proposed a 5 percent royalty rate. He asked if
he was understanding correctly that the administration now
wanted the rate to be further deducted.
Commissioner Boyle responded that the department would
support a royalty rate between 0 percent and 5 percent.
Representative Josephson noted that before he became a
legislator, there were many credit types in the Cook Inlet,
and over a decade later, the state had only just finished
paying for the credits. Under Representative Coulombe's
theory, the same strategy could be employed again.
Commissioner Boyle responded in the affirmative.
Representative Josephson asked if the administration's
position was to focus on the royalty issue.
Commissioner Boyle responded that the department aimed to
look at the most impactful and least complex tools the
state had at its disposal to potentially incentivize new
development. He explained that royalty quickly rose to the
top of the list. Additionally, property tax was an expense
that impacted companies early on in the process. As soon as
companies acquired leases and equipment and began
implementing improvements on the ground, companies started
incurring tax liability, which had an impact on early cash
flows and project economics. The department had analyzed a
vast array of issues and had talked about overriding
royalty interests as well as the overall expenses related
to operating in Cook Inlet.
Commissioner Boyle continued that in order to facilitate
new development, the state had made development more
attractive by implementing cash credits and bigger
incentives. He thought the legislature could explore new
potential programs but the department was trying to strike
the right balance between fiscal prudency and providing
energy for Alaskans. He thought that royalty relief for new
oil and gas development projects was fiscally prudent. The
bill was a less aggressive step but if the legislature
wanted to be more aggressive, the department would be happy
to provide its thoughts.
5:43:30 PM
Representative Galvin remarked that there were concerns
that the royalty relief was a "shot in the dark." She asked
if Commissioner Boyle could offer some reassurance that the
royalty relief would incentivize companies to provide
significant energy relief. She asked Commissioner Boyle how
certain he was that the bill would have the desired effect.
Commissioner Boyle responded that it was impossible to be
100 percent certain about anything, but he felt confident
that there would be a gas shortage if the status quo
continued. The question was how much relief was necessary
to incentivize more investment. There were many issues that
impacted the operators in Cook Inlet and affected
operators' ability to produce more gas. He was confident
that the department had modeled the general economic
parameters that projects would face and the impacts of
different tax rates and royalty rates. The department was
confident that lowering the royalty rate would increase the
rates of return for companies. Reducing the rate from 12.5
percent to 5 percent or less would make enough of a
difference to spur new investment and additional
production. He noted that the modeling was predicated on
each company's particular circumstances. By lowering
royalty rates, projects would be more attractive from an
investment standpoint. He did not think anyone could say
with 100 percent certainty, but he thought it should
incentivize development.
Representative Galvin understood that a royalty rate of 5
percent or less would incentivize development and that the
department had conversations with large companies on the
reduction. She thought that in ten years, if companies were
producing and Alaskans were consuming, the companies would
no longer need assistance. Determining the length of time
that companies would need assistance to incentivize
investment was important. She agreed that the legislature
wanted to show Alaskans that oil and gas production was
important. She thought it was difficult to lack certainty
and noted that the department did not have any contracts
with companies. She wondered if the legislature should have
more information before making a decision. She wanted to
have more certainty that what the legislature did would
make a difference.
5:50:25 PM
AT EASE
6:29:09 PM
RECONVENED
Co-Chair Foster relayed that there was a conceptual
amendment to Amendment 3.
6:30:02 PM
Co-Chair Johnson MOVED conceptual Amendment 1 to Amendment
3.
Representative Ortiz OBJECTED for discussion.
Co-Chair Johnson explained that the amendment was as
follows:
On page 1, line 3 of amendment 3
Delete "6.25" and insert "3".
On page 1, line 5 through 7 of the amendment, delete
all material and insert: "Sec.3 AS 38.05.180(mm) and
38.05.180(nn) are repealed January 1, 2035. Renumber
the following bill sections accordingly.
Representative Hannan asked for clarification that the 3
percent royalty would never be sunsetted.
Co-Chair Johnson responded in the affirmative.
Co-Chair Edgmon stood by the bill's underlying effort. He
remarked that it was difficult to craft a bill based on
hypotheticals. He noted that of all of the tax and oil
incentive bills he had worked on, HB 223 was the bill with
the least amount of analysis. He suggested that he knew
what the Senate would do with the bill and questioned what
the purpose was of the committee hearing the bill into the
evening. He thought the committee could spend hours going
through subjective data and did not know what would
realistically be different if the royalty rate was 3
percent, 4 percent, 5 percent, or 6 percent. He understood
that the department had done modeling but he questioned
what was happening with the bill in general.
Representative Josephson asked Co-Chair Johnson if the 3
percent rate would continue into perpetuity if the
conceptual amendment were to pass.
Co-Chair Johnson responded that it would continue for 10
years.
Representative Josephson noted that royalties could
typically not be increased and that it was a fixed
contract. Royalties could typically not be increased and
the royalty was a contract that was fixed forever, such as
a landlord-tenant agreement. The conceptual amendment
proposed that the 0 percent royalty would become a 3
percent royalty, which was not possible. He asked what the
royalty on new gas would be as of January 2, 2035.
6:35:34 PM
Mr. Crowther responded that the way the department
understood the conceptual amendment was that the provisions
of the bill would be repealed in 2035, which meant that the
ability to accept a payment or make payment of a lower
royalty for new projects would end. All parties that
received statutory eligibility prior to the repeal would be
eligible for lower royalty of 3 percent if the conceptual
amendment were to pass for the 10 years following the
commencement of production. The department understood the
conceptual amendment to mean that until 2035, a party had
the ability to begin commercial production and begin
receiving the 3 percent royalty rate for 10 years. After
January 1, 2035, a party could no longer begin receiving a
lower royalty rate than what was already indicated in the
lease.
Representative Josephson shared his understanding that
there would be a 10-year window to take advantage of the
lower royalty rate and if an entity utilized it, the
royalty rate would be 3 percent in perpetuity.
Mr. Crowther responded that he understood that the
conceptual amendment would be to change the 0 percent
royalty that was currently in the bill to 3 percent and
make the rate available for 10 years.
Representative Josephson asked if an entity that opted in
would be able to enjoy the lower rate forever.
Mr. Crowther responded that after the 10 years passed, the
rate would revert back to the 12.5 percent rate.
Co-Chair Foster noted that Representative Jesse Sumner and
Representative Tom McKay were in the audience.
Representative Stapp suggested that if there was a 10-year
abatement of royalty that would eventually revert back to
12.5 percent, it would be a structural risk that would
disincentive production. He thought it would be worse than
the current system and companies could theoretically be "on
the hook" for past operating costs. He agreed with Co-Chair
Edgmon and questioned why the committee was spending the
evening discussing the bill.
6:38:46 PM
Co-Chair Johnson noted that one of the reasons that 10
years made sense as a window was because the gas production
process was faster than the oil process. She suggested that
Commissioner Boyle elaborate.
Commissioner Boyle responded that he believed that a 10-
year window would be sufficient to enable a company to
recoup its initial investment and make its return. He
thought the time frame would be long enough to avoid a
significant risk of disincentivizing investment.
Representative Stapp asked if the department already had
the authority to adjust royalty rates. He wondered if the
department could already adjust the rates to 3 percent on
existing assets and if it could, he asked what the
timeframe for investment would be.
Commissioner Boyle responded that the commissioner had the
authority to adjust royalty rates on a case-by-case basis.
He recalled that in the history of DNR, rates had
successfully been changed only twice.
Mr. Crowther added that such an adjustment had happened a
handful of other times, but it had only happened twice in
recent history.
Commissioner Boyle noted that it was a complex process and
there was a lot of analysis and particular project
modeling. There was a lot of back-and-forth between the
department and the project applicant and historically the
processes took over a year. The intent was to send a
message to investors that the economic climate was improved
and to ultimately deliver more gas sooner to Southcentral.
Representative Stapp understood that modeling was possible
and had been done in the past. He thought that many of the
committee members wanted modeling to be done. He asked if
the conceptual amendment would make the process faster.
Commissioner Boyle responded that the amendment would make
the process faster and more effective. The operators had
testified that royalty relief would help incentivize the
drilling of more wells. The department was in support of
the conceptual amendment and the message it sent to
investors. He thought the amendment would result in not
only new production but in lower-cost energy in the
Railbelt.
Representative Stapp asked why action had not been taken
yet. He understood the purpose of the amendment was to
expedite the process, but wondered why the process had not
begun already since it was within the purview of the
department.
6:43:31 PM
Commissioner Boyle responded that to utilize the existing
mechanism for royalty relief, the department would need to
negotiate with each company on a project-by-project basis.
The process would not necessarily be holistic, but would
become about specific projects with specific economics that
would need to be sufficiently progressed for companies to
have the necessary information to provide to the department
in order for it to make a determination. The department
wanted all operators to progress in a way that would help
incentivize or facilitate additional investment. The
process would be complex, timely, and unwieldy, and the
department would not be confident that it could see that
process through to completion in a way that would bring
more production online within the window.
Representative Galvin appreciated the amendment and
highlighted that at least one company had shared that the
royalty rate was important. She also understood that the
department originally suggested a 5 percent rate and the
department had likely consulted with multiple companies
about the desired rate. She would be amenable to changing
the rate to 5 percent, and it was important to offer as
much assistance as possible to companies at the beginning
of a project. She had an amendment that had not yet been
discussed that would propose a five-year sunset, but she
realized that she should be open to a longer timeframe. She
suggested changing the sunset date to 2033 because the
state's biggest contract was expiring that year. If the
state had not incentivized new production by 2033, she did
not think the additional two years would make a difference.
She asked if she could offer a friendly amendment to the
conceptual amendment.
Co-Chair Foster responded that the committee could not make
an amendment to a conceptual amendment and that it would
need to be a separate amendment.
6:48:58 PM
Co-Chair Edgmon remarked that he was trying to think about
the issue through a business model perspective. The initial
cost of drilling and exploring would not be covered by the
royalty as the gas needed to be discovered before a company
could receive relief. The utilities were signing long-term
contracts with imported natural gas entities and he
wondered what the effect would be on business profiles in
an already highly marginal area. He appreciated the work
that had gone into crafting amendments that sought to find
a middle ground. He did not know what modeling had been
done and thought that the issues should be examined in more
depth than what the committee could do in the current
meeting. He asked what the modeling done internally by the
department suggested to prospective investors.
Commissioner Boyle responded that there were a number of
different commercial elements and a certain amount of
complexity involved in any analysis as it related to what
may or may not impact the economics of a particular
project. The department generally thought that Cook Inlet
natural gas would be more competitive from a price
perspective than imported LNG. The primary focus of major
natural gas suppliers was sourcing the least expensive
natural gas as possible. The utilities were confident that
natural gas suppliers would begin to produce new gas within
a certain period of time and would be less likely to sign
long-term contracts with imported LNG entities.
Commissioner Boyle stated that decisions needed to be made
soon, which was why it was important to pass the bill
quickly and make it as attractive as possible to potential
investors. He relayed that the state could spend years
analyzing the modeling and bringing in new prognosticators,
but the utilities had a finite window and the state needed
to take action as soon as possible to ensure that the
utilities had enough energy to provide to Alaskans. He
thought that domestically produced natural gas would
outcompete any imports and that incentivizing production
was the best decision the state could make. He thought the
bill might push companies to invest and bring new gas
online in a way that showed the utilities that there was a
path forward for domestically produced gas.
Co-Chair Edgmon felt like the committee was trying to
"squeeze more blood out of a turnip." He did not think the
utilities would wait much longer for the situation to
change. The committee had heard from utilities that they
had a fiduciary duty to provide the most reliable and
affordable power to Alaskans as possible. He was aware that
AGDC was working on a promising solution. He did not think
the bill would pass in the current year, and the committee
did not have a complete picture of the situation. The more
he considered the bill, the more questions he had, and he
would like to have more information before making any
decisions.
6:55:09 PM
Representative Josephson asked if any of the state
attorneys were online.
Co-Chair Foster was not aware of anyone.
Representative Josephson was concerned that there were two
different answers in the meeting: one stated that the 12.5
percent rate could be reduced to 3 percent and the rate
could be enjoyed into perpetuity, and the other answer
stated that all reduced rates would end in 2035 and revert
to 12.5 percent. He understood that the commissioner could
choose lease terms under the law. He wanted it clarified
whether the reduced percentage could be enjoyed into
perpetuity. He shared that he just received a note that
indicated that there was a legal representative in the
audience.
Co-Chair Foster asked if Mr. Crowther had any comments.
Mr. Crowther responded that there were two material dates
for interested producers under the conceptual amendment.
The first date was from the present day until 2035, during
which time producers could initiate receiving a 3 percent
royalty if production had already begun. After 2035,
producers would no longer be eligible to begin receiving
royalty. If production began at any time during the 10-year
period, producers would be eligible for the reduced rate
for 10 years starting at the date at which production
began. At the conclusion of the 10-year period, all
producers would revert to the underlying lease terms.
Representative Josephson understood that the benefit could
extend up to 20 years because as long as the producer began
production before 2035, the producer would be eligible for
the reduced rate. For example, if production began on
December 31, 2034, the producer would be eligible for the
credit for 10 years from that date. He asked if his
understanding was correct.
Mr. Crowther responded that if production began by 2035,
the producer would be eligible for the reduced royalty
rate.
6:58:46 PM
Representative Coulombe asked how gas for consumers would
be affected if the bill failed.
Commissioner Boyle responded that he was hesitant to make
predictions, but based on the department's current
projections, there would be a shortfall between supply and
demand of natural gas within the next two years if there
were no changes. The question was what could be done in the
meantime. He understood that there was testimony from
ENSTAR that building out the necessary infrastructure for a
large-scale LNG import project would not be possible until
2030 or beyond. The process was not a quick and easy
solution. The most likely scenario was that the utilities
would need to contract with one-off LNG shipments that
would transport gasification equipment into a storage
facility.
Commissioner Boyle questioned whether the state had enough
available storage. The LNG cargo would need to be
transported to the facility, unloaded, gasified, and
injected into the storage reservoir in order to be used
throughout the year to make up for the shortfall. The cost
of LNG would be much higher than what the state was
currently paying. If no action was taken, there would be
significant increases to utility rates as new gas imports
were factored in, which would continue to put upward
pressure on utility costs. He added that in the previous
winter, the state was close to having a significant energy
crisis in Southcentral because the producing wells out of
the storage facilities were barely keeping up with demand.
If the situation happened again, it could push the state
into a full energy crisis.
Representative Coulombe asked for clarification that LNG
was more expensive than Cook Inlet gas. She asked why
renewable energy could not simply be put online to fill the
gap.
Commissioner Boyle responded that any other energy option
would take years to implement, whether it was renewables, a
gas line, wind or solar farms, or anything else. He agreed
that the state needed to be working on implementing other
energy options, but the most pressing issue was getting
more gas into the system as quickly as possible, and
nothing was as quick and cost-effective as incentivizing
more Cook Inlet gas.
Co-Chair Johnson concluded that gas production needed to be
increased in Cook Inlet. She did not think that the
conceptual amendment would cause gas production in any
other part of the state to be curtailed.
7:05:14 PM
AT EASE
7:06:23 PM
RECONVENED
Co-Chair Foster asked if there was an objection to the
conceptual amendment.
Representative Stapp OBJECTED.
7:06:57 PM
A roll call vote was taken on the motion to adopt
conceptual Amendment 1 to Amendment 3.
IN FAVOR: Josephson, Tomaszewski, Hannan, Coulombe, Cronk,
Johnson
OPPOSED: Stapp, Galvin, Ortiz, Edgmon, Foster
The MOTION PASSED (6/5). There being NO further OBJECTION,
conceptual Amendment 1 to Amendment 3 was ADOPTED.
7:08:14 PM
Co-Chair Foster relayed that Amendment 3 as amended was now
back before the committee.
Co-Chair Edgmon appreciated the work that had gone into the
bill but did not think he had enough information to vote on
it, which was why he would be voting against the bill.
Representative Ortiz MANTAINED the OBJECTION.
Representative Galvin relayed that she would like to
propose another conceptual amendment.
7:09:06 PM
AT EASE
7:28:40 PM
RECONVENED
Representative Galvin MOVED conceptual Amendment 2 to
Amendment 3.
Representative Cronk OBJECTED.
Representative Galvin explained that the conceptual
amendment was as follows:
On page 1, line 3 of the amendment
Delete "3" and insert "4"
On page 1, line 5/6
Delete "2035" and insert "2033"
7:30:26 PM
Representative Josephson noted that the amendment title
should say CSHB(FIN) and not CSHB(RES).
Co-Chair Foster acknowledged that it was an error.
Representative Ortiz MAINTAINED the OBJECTION.
7:31:25 PM
A roll call vote was taken on the motion.
IN FAVOR: Hannan, Galvin, Ortiz, Josephson
OPPOSED: Coulombe, Tomaszewski, Cronk, Stapp, Johnson,
Edgmon, Foster
The MOTION to adopt conceptual Amendment 2 to Amendment 3
FAILED (4/7).
7:32:25 PM
Co-Chair Foster explained that Amendment 3 as amended was
before the committee. He asked Co-Chair Johnson to remind
the committee what the amendment as amended would do.
Co-Chair Johnson explained that conceptual Amendment 1
would change the royalty rate to 3 percent and implement a
10-year sunset. Additionally, any producer that began oil
production within the 10-year period would be permitted an
additional 10-year period to produce at the 3 percent rate.
The royalty rate would return back to the original 12.5
percent after the 10-year period had elapsed.
Co-Chair Edgmon was unsure if he should vote for the
amendment or if he should oppose it on principle. He did
not think he could make an educated policy decision.
Representative Ortiz OBJECTED.
7:34:42 PM
A roll call vote was taken on the motion to adopt Amendment
3 as amended.
IN FAVOR: Josephson, Coulombe, Galvin, Hannah, Johnson,
Edgmon
OPPOSED: Tomaszewski, Stapp, Foster, Cronk, Ortiz
The MOTION PASSED (6/5). There being NO further OBJECTION,
Amendment 3 as amended was ADOPTED.
7:35:53 PM
Representative Coulombe MOVED to ADOPT Amendment 4, 33-
LS0886\D.8 (copy on file):
Page 1, line 8:
Delete "50 percent of the minimum fixed royalty
share"
Insert "6.25 percent"
Representative Hannan OBJECTED for discussion.
Representative Coulombe explained the amendment, which was
requested by DNR. The amendment would reduce ambiguity
about the intended royalty rate for qualified new oil. The
amendment would set the royalty on qualified new oil at
6.25 percent instead of 50 percent of the minimum fixed
royalty share.
7:36:27 PM
Mr. Valdez explained that the amendment would simply
clarify the minimum fixed royalty share and that
Representative Rauscher would support the amendment.
Representative Galvin asked for clarification that the
amendment would not affect oil.
Mr. Valdez responded in the affirmative.
Representative Hannan asked DNR if 3 percent was the
minimum royalty rate on new oil. The bill had been expanded
to include all areas except the North Slope. She was
concerned about the discrepancies between royalty rates.
Mr. Crowther responded that the department could be
authorized to offer leases at 12.5 percent as the base
royalty. He was not aware of leases in any area aside from
Cook Inlet. There were two or three leases in Cook Inlet
and one had a 15 percent royalty rate and the other had a
16.2 percent royalty rate. Otherwise, the amendment would
not change the bill and would simply provide consistency.
Representative Hannan remarked that the committee had heard
a couple of examples of producers in Cook Inlet that would
not be subject to the same royalty rate. She asked what the
usual terms would be for minimum royalty. She asked whether
the rate would be 12.5 percent or if it would depend on
when the oil was developed.
Mr. Crowther responded that the 12.5 percent minimum
royalty would be the terms of new leases. Under the
legislation, a producer would be eligible if it also
qualified for the 6.25 percent rate.
Representative Hannan asked if there was concern from oil
producers that royalty rates were preventing new
production. She understood that gas producers had indicated
that it was an issue, but she had not heard the same from
oil producers.
Mr. Crowther responded that the complex geologic and
commercial realities of developing a project anywhere
outside of Cook Inlet and the North Slope had prevented the
projects from starting. He thought that royalty was a key
commercial component and could potentially incentivize
development in some areas, but it was also possible that
development would not proceed in any event.
7:40:38 PM
A roll call vote was taken on the motion.
IN FAVOR: Galvin, Cronk, Ortiz, Stapp, Coulombe, Johnson,
Foster, Tomaszewski, Edgmon
OPPOSED: Hannan, Josephson
The MOTION PASSED (9/2). There being NO further OBJECTION,
Amendment 4 was ADOPTED.
7:41:30 PM
Representative Coulombe MOVED to ADOPT Amendment 5, 33-
LS0886\D.7 (copy on file):
Page 1, line 8:
Delete "minimum fixed"
Representative Ortiz OBJECTED for discussion.
Representative Coulombe explained the amendment came at the
request of the governor to fix a drafting error. She noted
that DNR had indicated that it was unclear what the term
"minimum fixed" meant.
Representative Hannan was confused because Amendment 4 had
passed and had already deleted the words that would be
deleted by Amendment 5, making it no longer relevant.
Representative Coulombe WITHDREW Amendment 5.
7:43:01 PM
Representative Josephson MOVED to ADOPT Amendment 6, 33-
LS0886\D.15 (Nauman, 4/26/24) (copy on file):
Page 1, line 1:
Delete "oil and"
Page 1, lines 8 - 9:
Delete "and 50 percent of the minimum fixed royalty
share for qualified new oil"
Page 2, line 2:
Delete"(1)"
Page 2, line 3:
Delete "(A)"
Insert "(1)"
Page 2, line 5:
Delete "(B)"
Inse1i "(2)"
Page 2, line 7:
Delete "(C)"
Insert "(3)"
Page 2, line 9:
Delete ";"
Insert "."
Page 2, lines 10 - 17:
Delete all material.
Representative Stapp OBJECTED for discussion.
Representative Josephson explained the amendment. There was
not a lot of oil in Cook Inlet, but oil was often found
when searching for gas and vice versa. The problem was not
a gas problem it was an oil problem.
Representative Stapp remarked that he was confused by the
amendments to the bill and noted that members from
Southcentral kept voting in opposition to each other. He
understood that DNR had indicated that the wells in Cook
Inlet were mixed wells and contained both gas and oil. He
was not certain why there were two separate royalties or
what the implications of the difference would be. He asked
if payment would be required for both gas and oil if there
was a higher royalty on an oil well that also contained
gas.
Mr. Valdez responded that the gas pulled from a particular
lease had a royalty and tax rate separate from the oil
pulled from the same royalty and lease. He highlighted that
the oil from Cook Inlet, which was sold at a higher rate
than the gas, was intended for use in Alaska only.
7:45:41 PM
Representative Stapp asked why a large royalty on oil was
being proposed if the oil was only being utilized by the
Alaskan consumer.
Commissioner Boyle responded that incentivizing oil was an
important component of incentivizing gas. There was a
significant amount of gas in place but also a significant
amount of oil that could be produced if a platform were to
be built. A significant driver of gas production in Cook
Inlet was companies looking for oil. The existence of and
desire for the underlying oil was what had helped provide
the gas. As the oil reservoirs had depleted and finding new
pools of oil became increasingly more challenging, there
was a corresponding decline in the amount of gas that was
produced. He thought that incentivizing the oil was a key
element to incentivizing gas because a company would be
sensitive to oil and gas rates as it evaluated the overall
project economics. There were oil and gas deposits that
were co-located and would be brought into production if the
incentives were sufficient.
Mr. Crowther noted that the 3 percent rate for gas was
chosen because the gas commodity would not be incentivized
like the oil commodity was; however, the incentive for oil
was also critical for development.
Representative Stapp asked why Representative Josephson had
offered an amendment that would hurt his constituents by
increasing oil prices.
Representative Galvin asked if royalty relief in Cook Inlet
would be ended if oil was exported from Middle Earth if the
bill were to pass as amended.
Mr. Valdez responded that there would be a following
amendment that would add clarity.
Representative Galvin asked how much of the projections of
undiscovered gas was expected to be produced as a secondary
result of oil production and how much was expected to be a
primary gas field.
Mr. Crowther responded that the Cosmopolitan Oil and Gas
Field was a large oil field and could potentially result in
huge contributions of gas. Some fields were gas-only but
could also potentially target oil and deeper horizons. Both
prospects could benefit from the reduced royalty rates and
additional prospects would be advantaged as well.
Representative Galvin understood that there could be an
advantageous opportunity for a large oil field and an
opportunity for Alaska to recoup some potential royalty.
It could be a big deal for both the producer and for
Alaska. She wanted to ensure that the committee understood
the scope of the bill because it had not discussed the bill
extensively. She did not think members understood that the
bill could result in increased oil production, which was
good for Alaska. She thought it was important for Alaska to
benefit as much as possible while not pushing companies
away.
7:51:50 PM
Mr. Crowther responded that there were currently
approximately 7,000 to 8,000 barrels per day being produced
in Cook Inlet, which was all being consumed in-state
through the Marathon Refinery. There were potential
developments of additional oil, such as the Cosmopolitan
Field. He warned against characterizing resources as large
or small because the resources all had different attributes
relative to the market. The fields would materially
contribute to in-state use and extend the availability from
an oil production context. He noted that Cook Inlet oil had
declined and additional fields would not shift the paradigm
of oil production in a way that would cause a material
change in the market.
Representative Galvin asked if producers would also receive
royalty relief on gas as well as oil if producers began
producing gas at the Cosmopolitan Field.
Mr. Crowther responded that the bill would include the
possibility for production to be a qualified new oil or a
qualified new gas. If a shallow well produced qualified new
gas it would be eligible, and if a horizontal well went
deeper into the oil, it would potentially qualify. There
was potential additional well schematics that could result
in qualified new oil at the Cosmopolitan Field.
Representative Galvin understood that 7,000 barrels was not
substantial, but the expansion potential was not known. She
asked if there was any information on the expansion
potential.
Mr. Crowther suggested that Mr. Nottingham speak to the
potential full field development at Cosmopolitan. He noted
that development was not approved under current terms,
which was strong evidence that whether the development was
oil-only, oil and gas, or gas-only, it was not competitive.
7:54:19 PM
Mr. Nottingham responded that he did not know what the
exact rate would be at Cosmopolitan under full development,
but he could follow up with the estimates. While it was a
significant development, it probably would not dramatically
change the paradigm of oil production in Cook Inlet.
Representative Galvin appreciated understanding more of the
context. The scope was not fully known, even with the
amendment, but she thought that a smaller company might
find the relief helpful. She asked if her understanding was
correct.
Commissioner Boyle responded that the relief made a
difference to Cosmopolitan. He explained that DNR was
trying to target new production and improve the economics
at Cosmopolitan. He relayed that Cosmopolitan had drilled a
few low-producing wells from onshore to target the oil
horizon that largely lay offshore. If more complex
horizontal wells were drilled, the difference would be more
significant. Every barrel of oil that could be produced in
Cook Inlet was important because the oil had value-added
processing in-state. The oil that was at gas station pumps
in the state generally came from Cook Inlet, which
illustrated the benefit trickling out amongst the broader
economy. Every additional barrel of Cook Inlet oil was
important.
7:57:46 PM
Representative Ortiz asked if there would be a potential
future implication on the development of oil outside of
Cook Inlet if the royalty rate for oil in Cook Inlet was
lowered.
Commissioner Boyle responded that he did not see it being a
factor. He did not think it would dissuade companies from
investing in other areas in Alaska.
Representative Ortiz responded that he did not mean to
imply that a lower rate would dissuade investment, but he
was curious if a company would use Cook Inlet's lower rate
as leverage to ask the state for a better royalty rate.
Commissioner Boyle responded that the legislature was a
good "stage gate" in terms of holding the line on certain
terms in which oil and gas was offered across the state. He
was fully confident that the legislature would make a well-
informed decision.
Representative Josephson was concerned because the hearing
was becoming highly political. He had heard comments
wondering how the legislature could do anything other than
help the citizens of Anchorage and other comments
suggesting that he was personally increasing the prices of
gas. He was disturbed by the comments. He had just happily
voted in favor of reducing royalty rates from 12.5 percent
to 3 percent. He was puzzled by the divide in Anchorage.
He was told that there was a gas crisis, not an oil crisis.
The commissioner had made a compelling argument, but his
amendment intended to solve the gas crisis.
Representative Cronk MAINTAINED the OBJECTION.
8:01:30 PM
A roll call vote was taken on the motion.
IN FAVOR: Josephson, Edgmon, Foster, Stapp, Hannan, Galvin,
Ortiz, Johnson
OPPOSED: Coulombe, Tomaszewski, Cronk
The MOTION PASSED (8/3). There being NO further OBJECTION,
Amendment 6 was ADOPTED.
[Note: action on Amendment 6 was rescinded later in the
meeting and the amendment failed to pass on a vote of 5/6
at 9:32 p.m.]
8:02:29 PM
Representative Coulombe MOVED to ADOPT Amendment 7, 33-
0886\D.6 (Nauman, 4/25/24) (copy on file):
Page 1, line 10, following "applies":
Insert "to qualified new gas or qualified new oil
from a lease"
Page 1, line 11, following "production":
Insert "of the qualified new gas or qualified new
oil"
Page 1, lines 13 - 14:
Delete "oil or gas produced from the Cook Inlet
sedimentary basin"
Insert "the qualified new gas or qualified new oil"
Representative Hannan OBJECTED for discussion.
Representative Coulombe explained that the amendment came
at the request of DNR and would clarify that the triggers
terminating the royalty reduction only applied to qualified
oil and gas receiving the benefits.
Representative Hannan understood that Amendment 6 had just
been adopted and would delete occurrences of "oil" in the
bill, while Amendment 7 would insert oil back into the
bill.
8:03:43 PM
AT EASE
8:04:41 PM
RECONVENED
Representative Coulombe WITHDREW Amendment 7 (copy on
file).
Representative Josephson WITHDREW Amendment 8 (copy on
file).
8:05:43 PM
AT EASE
8:23:03 PM
RECONVENED
Co-Chair Foster noted that the committee had about six
amendments left. He would take another break as some
members had not yet returned.
8:25:55 PM
AT EASE
8:26:54 PM
RECONVENED
Representative Galvin MOVED to ADOPT Amendment 9, 33-
LS0886\D.19 (copy on file):
Page 1, line 11:
Delete "10"
Insert "five"
Page 1, line 12, following "2024":
Insert ", except that the commissioner may extend
the royalty reduction under this paragraph an
additional five years if, after the third year of
commercial production, the commissioner determines
that extending the royalty reduction is in the best
interest of the state"
Representative Cronk OBJECTED for discussion.
Representative Galvin explained that the amendment would
change the sunset from 10 years to 5 years.
8:28:02 PM
Representative Stapp remarked that earlier in the meeting,
Representative Galvin had suggested changing the sunset to
eight years. He asked why she now suggested that the sunset
should be changed to five years.
Representative Galvin noted that when she suggested
changing the sunset to eight years, she was doing so
because she thought it would pass. In her conversations
with consultants, she understood that five to six years was
a reasonable amount of time. She wanted to ensure that the
commissioner had the opportunity to do what was best for
Alaska.
Mr. Valdez responded that he thought the amendment strayed
away from the intent of the bill, which was to create
certainty and a roadmap for investors that were investing
millions of dollars into risky assets. He thought there
needed to be certainty for companies if the state wanted to
incentivize more gas production.
Commissioner Boyle agreed with Mr. Valdez's statements. He
appreciated the intent of the amendment and the focus on
being prudent and wise stewards of the state's resources.
He thought that the inherent turnover of commissioners
contributed to uncertainty, and he was biased towards
implementing a clear and defined sunset period that would
offer more certainty to companies.
Representative Galvin responded that she disagreed that the
amendment would not provide permanent certainty. The
amendment would provide certainty for five years and an
extension for another five years. She thought it was
important to consider the economics of the oil and gas
fields. She understood that the state would be allowing for
a bigger incentive than it usually did, but she was
suggesting that the state offer a large incentive first,
then decide what the next incentive should be based on the
effects of the first incentive. She explained that she
misspoke and that the amendment would not be implementing a
sunset, but a duration. The sunset would still be 2035. She
acknowledged that it was complex, but she hoped that the
amendment was clear.
[Although not explicitly stated, the objection was
maintained.]
8:33:11 PM
A roll call vote was taken on the motion.
IN FAVOR: Galvin, Ortiz, Josephson, Hannan
OPPOSED: Coulombe, Tomaszewski, Cronk, Stapp, Johnson,
Edgmon, Foster
The MOTION to adopt Amendment 9 FAILED (4/7).
8:33:58 PM
Representative Josephson MOVED to ADOPT Amendment 10, 33-
LS0886\D.17 (Nauman, 4/26/24) (copy on file):
Page 1, line 13, following "produced":
Insert "by the lessee"
Representative Cronk OBJECTED for discussion.
Representative Josephson explained the amendment. He
understood that the bill as written stated that royalty
reduction for all new gas participants would end when any
single gas participant shipped any commercial quantity of
oil or gas produced from the Cook Inlet sedimentary basin.
He did not think the legislature wanted to enact what was
written in the bill because it meant that the lessee
enjoying the royalty reduction could not ship new gas out
of state or it would lose the royalty reduction.
Mr. Valdez responded that in discussions with DNR, the
amendment would make sense, especially in light of
Amendment 7 not being adopted. He thought the amendment
would clarify the intent of the bill and he would support
it.
Commissioner Boyle responded that he would also support
Amendment 10.
Representative Cronk WITHDREW the OBJECTION.
Representative Tomaszewski asked if an entity other than
Alaska LNG could produce oil or gas and not be subject to
the tax royalty.
Mr. Crowther responded that the amendment clarified the
point of the bill. He explained that the amendment would
confirm the date on which a commercial quantity of gas
produced by LNG in the Cook Inlet sedimentary basin was
shipped out of state. The benefit would not be lost if
other companies shipped out of state.
8:37:24 PM
Representative Galvin asked if the relief would not end if
the market changed and oil and gas were not exported from
Cook Inlet.
Mr. Crowther responded that the department understood the
intent of the bill sponsor and it made sense for an
investor to receive the benefit of the relief as long as
the investor was focused on providing energy to Alaskans.
The amendment seemed to continue the relief beyond the
point of providing energy to Alaskans. He thought there was
a misunderstanding.
Representative Galvin remarked that it seemed like there
would be a significant change in the market if an LNG
export facility opened up.
Representative Josephson explained that qualified new gas
was the topic. The department and sponsor agreed that they
wanted to keep new oil in the state, especially if the
company was receiving a reduced royalty rate.
There being NO further OBJECTION, Amendment 10 was ADOPTED.
8:39:12 PM
AT EASE
8:39:58 PM
RECONVENED
Representative Coulombe MOVED to ADOPT Amendment 11, 33-
LS0886\D.9 (copy on file):
Page 2, lines 5 - 6:
Delete "has previously produced gas, but did not
produce gas during calendar year 2024"
Insert "the commissioner determines has not produced
gas during the preceding six months but that has
previously produced gas"
Page 2, lines 13 - 14:
Delete "has previously produced oil, but did not
produce oil during calendar year 2024"
Insert "the commissioner determines has not
produced oil during the preceding six months but that
has previously produced oil"
Representative Josephson OBJECTED for discussion.
Representative Coulombe explained that she wanted to move a
conceptual amendment. The second part of the amendment no
longer applied due to the passage of other amendments.
Representative Coulombe MOVED conceptual Amendment 1 to
Amendment 11. The amendment would delete lines 6 through 11
of Amendment 11 [pertaining to page 2, lines 13 through 14
of the bill].
There being NO OBJECTION, conceptual Amendment 1 to
Amendment 11 was ADOPTED.
8:41:03 PM
Representative Coulombe explained that Amendment 11 as
amended would revise the second of the three ways in which
oil and gas could qualify as new in order to receive the
royalty reduction. The change would more thoroughly reflect
the intent of the bill to drive new production in Cook
Inlet. She noted that the amendment was at the request of
DNR.
Representative Josephson remarked that he did not have a
problem with the amendment unless a producer deliberately
suspended production in order to become eligible for the
lower royalty.
Mr. Crowther replied that he viewed the scenario as
extremely unlikely. The amendment stated that it applied to
producers that had not produced oil or gas for six months,
which meant that a producer could not simply close a well
for a day, a week, or even a month and then become eligible
for the royalty. Additionally, existing wells would see
significant decline curves as all of the currently
operating producers could potentially qualify under the
bill for relief.
Representative Hannan asked if there were any producers
that had stopped production in Cook Inlet within the last
six months.
Mr. Crowther responded in the negative.
Representative Hannan asked if there were any producers
that had stopped production in Cook Inlet within the last
12 months.
Mr. Crowther responded that there had been some fields that
had been decommissioned in recent years, but not in the
last 12 months.
Co-Chair Edgmon understood that Mr. Crowther stated that
Representative Hannan's hypothetical was unlikely, but he
wondered if a scenario could arise. There was discussion in
a presentation in April about reducing royalty rates on
undiscovered or offline fields. He thought it was a
judgment call and he wanted to adhere to the recommendation
of the department.
Commissioner Boyle responded that if companies were not
producing oil and gas, the companies were also not
collecting revenue. He could not think of many scenarios in
which a company would sever itself from cash flow in the
hopes that it might also be able to produce in the future
under new terms.
8:44:55 PM
Co-Chair Foster noted that Representative Rauscher had
returned and was in the audience.
Representative Josephson WITHDREW the OBJECTION. There
being NO further OBJECTION, Amendment 11 was ADOPTED as
amended.
8:45:26 PM
Representative Coulombe MOVED to ADOPT Amendment 12, 33-
LS0886\D.10 (Nauman, 4/25/24) (copy on file):
Page 2, line 9:
Delete "economically"
Page 2, line 17:
Delete "economically"
Representative Josephson OBJECTED for discussion.
Representative Coulombe explained that the amendment was
brought forth at the request of DNR and aimed to clarify
the term "economically." The department was concerned that
the term might confuse the bill with other royalty
provisions and statutes and risk lengthening the associated
timelines.
Mr. Crowther noted that lines 4 and 5 of Amendment 12
referenced language that had been struck from the bill. The
term "economically" referenced the economic feasibility of
oil production, and he wanted to note that there were
multiple reasons why production might not be feasible, such
as geological and technical variables. The economics were
a critical part, but the technical feasibility was an
important driver.
Representative Hannan was confused because there had been
earlier references that the bill was economic relief, but
nothing in the bill changed the technology or geology. She
did not think the technological or geological factors made
for an economic issue. She was confused as to why the term
economic was being used.
Mr. Crowther responded that the bill was about bringing
forward new supplies of natural gas to impact the economics
in three categories: fields that were not producing at all,
fields that had been offline for six months, and areas that
were not economically reachable from current operations.
The amendment would clarify the third category and impact
areas that were not geologically, commercially,
economically, or technically reachable. The department did
not view the amendment as a major substantive change, but
simply as a change to the third category. He provided an
example of the third category where an operator had to
drill a new well because they were producing from an
existing platform but could not reach or drain a particular
part of the field because of the nature of the pressure in
a reservoir. He thought the situation could be considered
not economically feasible because of the cost of the new
well. He thought the amendment would make the bill clearer
and inclusive of geological, technical, and economic
barriers.
[Although not explicitly stated, the objection was
maintained.]
8:49:28 PM
A roll call vote was taken on the motion.
IN FAVOR: Cronk, Galvin, Tomaszewski, Stapp, Ortiz,
Coulombe, Edgmon, Foster
OPPOSED: Hannan, Josephson
Co-Chair Johnson was absent from the vote.
The MOTION PASSED (8/2). There being NO further OBJECTION,
Amendment 12 was ADOPTED.
8:50:20 PM
Representative Stapp MOVED to ADOPT Amendment 13, 33-
LS0886\D.12 (Nauman, 4/25/24) (copy on file):
Page 2, following line 17:
Insert a new subsection to read:
"(oo) Notwithstanding and in lieu of a requirement
in the leasing method chosen of a minimum fixed
royalty share, or the royalty provision of a lease or
an existing royalty settlement agreement, for gas that
is produced from leases that include land north of 68
degrees North latitude and that is subsequently
liquefied or used in the liquefaction or
transportation process, the lessee shall pay a royalty
of zero percent if the lessee agrees to sell the gas
to a publicly owned utility or a utility regulated
under AS 42.05 at a rate that reflects the discounted
royalty rate provided under this subsection. The
royalty rate under this subsection applies until the
earlier of either
(1) l0 years following the first commercial
use of liquefied natural gas paying a royalty rate
under this subsection; or
(2) the date on which a commercial quantity of
liquefied natural gas produced from the leases that
include land north of 68 degrees North latitude is
shipped out of the state."
Representative Stapp MOVED to ADOPT conceptual Amendment 1
to Amendment 13 (copy on file):
Page 1, line 14, following "leases":
Insert the following:
"receiving the royalty rate under this
subsection."
Co-Chair Foster OBJECTED for discussion.
Representative Stapp explained conceptual Amendment 1 to
Amendment 13. He explained that the language in the
conceptual amendment would clarify that leases that were
receiving the specific royalty rates and not simply all
leases in a given geographic area.
Co-Chair Foster WITHDREW the OBJECTION. There being NO
further OBJECTION, conceptual Amendment 1 to Amendment 13
was ADOPTED.
Co-Chair Foster explained that Amendment 13 as amended was
before the committee.
Representative Stapp explained that the amendment would
provide a royalty relief to consumers receiving liquefied
natural gas from the North Slope. Currently, North Slope
oil was set to be the state's main supply. He presumed that
Southcentral would also soon need to truck gas from the
North Slope as well. Royalty relief would directly benefit
the consumers utilizing the gas. He had heard a significant
amount of testimony that Alaskans should not need to pay
royalties on domestic use of gas. If the amendment was
adopted, Alaskans in the Interior would experience a
substantial reduction in the cost of gas for domestic use.
There were a few provisions in the bill with a 10-year
sunset clause. In October of 2024, a Harvest Alaska oil
liquefaction facility would be completed that would
facilitate gas being trucked from the North Slope to the
Interior for domestic use. He suggested that the state
should keep all options open on the table as the potential
gas shortage approached. However, he did not think there
would ever be a gas shortage on the North Slope and
utilizing the gas on the slope for domestic use would
benefit all Alaskans.
Mr. Valdez commented that the amendment would not affect
the underlying intent of the bill, which was to provide gas
availability relief to the Cook Inlet. The sponsor
supported the amendment.
Commissioner Boyle noted that the department supported any
efforts to reduce energy costs for all Alaskans and was
neutral on the amendment. He hoped to see the same
reciprocity when it came to gas affordability in Anchorage.
8:54:08 PM
Co-Chair Edgmon asked Representative Stapp if Amendment 13
was tied into his earlier amendment [Amendment 1] involving
Middle Earth.
Representative Stapp responded in the negative and
explained that Amendment 13 would cover a separate
geographic region. He relayed that Amendment 1 related to
Middle Earth and Amendment 13 related to the North Slope.
Co-Chair Edgmon thought the core of the bill would change
from Cook Inlet relief to interior relief if Amendment 13
were to pass. He asked if his understanding was correct.
Representative Stapp responded that his philosophy was that
all Railbelt consumers should receive energy relief if
there was a dramatic reduction in the state share royalty.
He did not understand the reasoning behind the gas bought
by Fairbanks being sold at a 12.5 percent royalty rate
while other areas of the state could buy gas at a 3 percent
rate.
Co-Chair Edgmon understood that the bill intended to
incentivize companies to extract oil in marginal fields in
marginal conditions at a market-driven price. He asked if
he was correct.
Commissioner Boyle responded that it was a key element of
the bill to help incentivize and improve the economics for
natural gas and oil production, although the amendments had
stricken the oil production portion from the bill. He noted
that the hope was that acquiring more gas would help keep
the prices of Cook Inlet-produced natural gas as low as
possible to provide as much relief as possible to the end
users.
Co-Chair Edgmon remarked that the amendment would offer to
consumers in the Interior direct relief, whereas the bill
without the amendment would not provide relief to Cook
Inlet itself, but only to the consumers at market rate,
which could be more expensive than the gas in the Interior
receiving the relief.
Mr. Crowther responded that he did not have the delivered
cost of gas to the consumer on the top of his head. The
royalty assessed on the gas would be material from a
consumer's perspective. The cost of gas trucked down from
the North Slope would be significantly higher than the
current delivered cost rate in Southcentral.
Co-Chair Edgmon commented that he was not sure if he would
ultimately object to the bill because he did not understand
it fully. He understood Representative Stapp's intent but
had not made up his mind on it.
8:58:16 PM
Representative Stapp appreciated the comments. During many
committee meetings, he constantly brought up the fact that
Cook Inlet gas had price controls and had been heavily
subsidized, which affected the market price. The North
Slope gas that the state was going to purchase in the
Interior had no price controls and there was a price at the
point of sale and an additional cost to deliver the gas. He
understood the need to offer subsidies and reduce royalties
for Southcentral to ensure that Alaskans could afford gas.
He thought it would be unfair to continue subsidies and
disallow market economics to dictate the actual price of
gas in Cook Inlet without considering other people in the
state who also used gas and had to incorporate all of the
market demand into the process.
Co-Chair Edgmon remarked that he was feeling a little left
out as a rural legislator.
Representative Ortiz echoed Co-Chair Edgmon's comments
about feeling left out. He asked what the implications
would be of lowering the royalty share. He asked for an
explanation of what the amendment would do.
Representative Stapp responded that it would take the
royalty that public utilities paid for the purchase of gas
and reduce it to zero. He would entertain an amendment to
change it to 3 percent for the sake of parity.
Representative Ortiz asked what the fiscal implications
would be for the state.
Representative Stapp responded that there was currently no
gas being used and there would be no change until the end
of June when the bill would become effective. There was no
current fiscal impact and there would be no change in the
royalty rate. The Harvest facility would not come online
until the end of the year. The amount of gas in thousand
cubic feet (MCF) was marginal, but he would defer to DNR
for the exact figures. The amount of gas would be
fractional compared to overall demand.
Mr. Crowther responded that the current contracts called
for approximately two billion cubic feet (BCF) per year.
The Cook Inlet demand was generally around 70 BCF per year.
The gas sales price was approximately between $2 and $3.
The current royalty on a single MCF of gas would be around
12.5 percent of the price.
Co-Chair Edgmon asked if the amendment would benefit every
utility if HB 307 passed and the wheeling rates were
eliminated.
Mr. Crowther asked for him to rephrase the question.
Co-Chair Edgmon explained that he understood that the
utilities charged consumers in two different ways:
transmission rates and wheeling rates. He understood that
HB 307 would remove the wheeling rates. If the amendment
were to pass and HB 307 were to pass, the entire Railbelt
would receive a subsidy for electricity.
9:03:06 PM
Mr. Crowther responded that he was not certain that he had
a full understanding of electricity rates in the markets.
He suggested that Representative Stapp had a better
understanding.
Representative Stapp explained that the amendment would
apply specifically to LNG. If the utilities were to truck
the LNG and utilize it for power generation, the rates on
the Railbelt would be lowered, which would increase the
viability of the Power Cost Equalization (PCE) program. He
agreed that if the Railbelt transmission line was unified
and liquified gas was utilized in power generation, Co-
Chair Edgmon would be correct.
Co-Chair Edgmon remarked that it would make sense for the
utilities in Fairbanks to utilize liquefied natural gas
because the rates would be lower, which in turn would allow
cheaper electrons to flow through the entire system.
9:04:48 PM
Representative Josephson understood that the homes in the
Fairbanks North Star Borough (FNSB) that used natural gas
currently acquired the gas from Cook Inlet. He asked for
clarification that the process would be altered in part in
about six months.
Representative Stapp clarified that the process would
change entirely.
Representative Josephson MOVED to ADOPT conceptual
Amendment 2 to Amendment 13. He explained that the
amendment would change "zero" to "three" on line 7 of
Amendment 13.
There being NO OBJECTION, conceptual Amendment 2 to
Amendment 13 was ADOPTED.
9:05:38 PM
AT EASE
9:06:18 PM
RECONVENED
Co-Chair Foster clarified that conceptual Amendment 2 to
Amendment 13 had just been adopted.
Representative Josephson asked the department if Amendment
13 as amended was written tightly enough and would not
cause unintentional negative impacts. He wondered if the
profits would be negatively impacted if the amendment were
to pass. He saw profit generation and increased domestic
gas production as the main goals of the bill.
Mr. Crowther responded that the department believed the
amendment addressed the concerns effectively. He
highlighted specific provisions that would help the bill
achieve its intended purpose. One of the provisions focused
on selling gas to publicly owned utilities or utilities and
was regulated under AS 42.05, with a requirement for a
discount on the rate. The department believed that the
provision would limit any impact on exports. Additionally,
a clause addressed savings from the impact on commercial
quantities of LNG shipped out of the state. The department
felt that the provisions sufficiently constrained the
amendment, preventing potential negative consequences.
Representative Josephson WITHDREW the OBJECTION.
There being NO further OBJECTION, Amendment 13 was ADOPTED
as amended.
9:08:36 PM
Co-Chair Johnson MOVED to RESCIND action on Amendment 6.
There being NO OBJECTION, the action was RESCINDED.
Co-Chair Foster clarified that rescinding action would mean
that the amendment would be treated as if it had never been
voted upon. There were two motions before the committee:
one to rescind action and another to adopt Amendment 6 as
originally written.
Representative Josephson MOVED to ADOPT Amendment 6.
9:09:07 PM
Co-Chair Foster asked Representative Josephson to summarize
the amendment again.
Representative Josephson explained that the amendment would
shift the focus of the bill from oil and gas to gas alone.
Representative Stapp OBJECTED.
Representative Stapp noted that the amendment had been
adopted earlier and asked whether the department thought
that the gas in the deposit might not be developed if the
amendment were re-adopted as written.
Commissioner Boyle responded that passing the amendment and
removing the royalty reduction for new oil would create a
fatal flaw in the bill. While he understood Representative
Josephson's position, he explained that the economics of
oil and gas were closely intertwined. He emphasized that if
gas fields were influenced by underlying oil, improving the
economics of gas alone would not be sufficient to move the
projects forward. He believed that separating oil from gas
production would not adequately incentivize more gas
production.
Representative Josephson asked if BlueCrest was currently
producing oil.
Commissioner Boyle responded that the company was currently
producing some oil.
Representative Josephson relayed that he offered Amendment
15 because he talked to the owner of BlueCrest over the
last few days and the owner's request was for $400 million
for the development of gas. The request was not seeking
royalty reduction on oil.
Representative Galvin asked if rescinding action on
Amendment 6 meant the committee would need to return to all
of the other amendments that were adopted with the
understanding that the bill would focus strictly on gas.
She thought the process felt messy and she was concerned
that it felt as though offline conversations were involved.
She was not happy with the committee's process, and it did
not feel right.
Co-Chair Foster remarked that he had been present for many
oil tax debates and he agreed that it was a long process.
The one difference that had been raised was how quickly the
shortage problem was progressing. He agreed that the
process was messy in that the committee was discussing a
wide array of topics in the current meeting. He offered
reassurance that all adopted amendments would be rolled
into a committee substitute (CS). He suggested that the
question about how rescinding action on Amendment 6 would
affect other amendments was something the committee could
discuss when a clean CS was before the committee. The
current meeting was not the final step in the process.
9:16:00 PM
Representative Galvin asked for the department to give her
certainty that the bill needed to include oil as well as
gas to successfully drive production.
Commissioner Boyle responded that he had a high level of
confidence that by including royalty relief on the oil, the
projects would become more economic. Based on DNR's
modeling, analysis, and understanding of the geology and of
the behavior and investment decisions typically made by
companies, he was confident that the royalty rate on oil
needed to be reduced as well as the gas royalty rate to
incentivize new production.
Representative Galvin wanted to add more caveats. She
understood that the companies needed to be incentivized,
but she was not sure the bill was the right way to go about
it. She thought that in the past, the committee had heard
from more sources than only the department. She appreciated
the work of the department, but she wanted to hear more
voices. The amendment would be offering substantial relief
to companies and she wanted the significance to be
understood.
Commissioner Boyle appreciated the fact that everyone was
endeavoring to make as educated and responsible choices as
possible. He thought it was important to highlight that the
bill was focused on incentivizing new production and not on
current production. The state treasury would not be
immediately impacted. She understood that the true debate
was whether it would be better to get "3 percent of
something than 100 percent of nothing." We're not talking
about an immediate impact on the state treasury. The
current modeling suggested that the state was on a downward
trajectory. He thought that incentivizing new oil and gas
would not directly make the state lose money but instead,
Alaskans would get more value from the state's resources
than if the resource were to just sit stagnant under the
ground not being produced, refined, and providing heat and
light for homes.
Representative Galvin commented that the math was not
difficult to understand. She thought that behavioral
changes were necessary and the state needed to decide how
to best bring about positive behavioral changes. She
thought that the legislature and the public needed to
understand that the proposed royalty rate had changed
drastically even over the last few hours. The rate made a
big difference in changing the behavior of oil and gas
companies, and she understood that the bill could bring
about the change, however, she needed to know that the
legislature was making good decisions for the state and not
simply playing a partisan game.
9:22:44 PM
Representative Josephson stated that the state currently
received $85,000 a day in royalty oil from Cook Inlet,
totaling $31 million annually. He clarified that the
figures referred to old oil and gas, while the bill focused
on new oil production. He mentioned hearing that the state
was currently producing only 8,000 barrels per day. He did
not believe the math supported reducing oil royalties and
offered Amendment 15 to support new oil production and
assist BlueCrest in building a new platform. To his
knowledge, BlueCrest had never requested oil royalty
relief. He would support Amendment 6 as written.
Co-Chair Edgmon expressed that he wanted to speak in
support of Representative Galvin's earlier comments. He
thought that Amendment 15 amendment changed the complexion
of the bill. He asked how all of the pieces of the bill and
amendments were woven together to create a full picture of
the bill. He asked if he was perhaps reading too much into
the conversation.
Commissioner Boyle responded that he thought everyone was
unified behind the goal of making more energy more
available and more affordable for Alaskans. He explained
that the bill initially focused on Southcentral, as it was
the region closest to facing a gas shortage crisis. He
believed including North Slope oil in the bill was a fair
addition, acknowledging that offering simple relief to
Alaskans was beneficial, even if the exact extent of the
relief could not be easily quantified. He noted that
incentivizing new production in Cook Inlet could reduce the
impact of high energy prices, with energy from local
sources being less expensive than imported LNG. He
emphasized that while reducing energy costs for the
Railbelt helped those relying on the PCE program, Alaskans
outside the Railbelt also had significant needs. He warned
that if the state lost control over its gas supplies and
had to rely on expensive alternatives, there would be
ripple effects throughout the state. He stressed the
importance of viewing the situation in a holistic manner.
9:28:48 PM
Co-Chair Edgmon remarked that the bill had changed
significantly and its scope had expanded. He suggested that
the committee should have had a PowerPoint presentation to
refer to graphics and better understand the bill as a
whole. He expressed concern about discussing such a complex
subject late in the evening during the final weeks of
session. He clarified that he was not trying to cast blame
but felt that the process was complicated, and he was
attempting to better understand the bill and its
implications for the state.
Commissioner Boyle responded that he was not fully aware of
all the policy changes related to Middle Earth. He
explained that the goal was to make the region more
attractive for increased activity. While he would fully
support oil and gas production in Middle Earth, he was not
aware of any companies actively exploring energy resources
in the area. He acknowledged that the inclusion of Middle
Earth was a good idea in theory, but he believed similar
efforts were already addressed in another bill related to
geothermal energy. He emphasized that the focus of HB 223
should remain on Cook Inlet.
Co-Chair Foster noted that Co-Chair Johnson moved to
rescind action on Amendment 6, which had passed. The
original Amendment 6 as written was back before the
committee.
Representative Stapp MAINTAINED the OBJECTION.
9:31:50 PM
A roll call vote was taken on the motion.
IN FAVOR: Ortiz, Josephson, Hannan, Edgmon, Foster
OPPOSED: Galvin, Cronk, Coulombe, Stapp, Tomaszewski,
Johnson
The MOTION to adopt Amendment 6 FAILED (5/6).
9:32:59 PM
Representative Coulombe WITHDREW Amendment 14 (copy on
file).
9:33:05 PM
Representative Josephson MOVED to ADOPT Amendment 15, 33-
LS0886\D.18 (Nauman, 4/26/24) (copy on file). [Due to the
length of the amendment, it was not included in the
document. Please see the copy on file for details.]
Representative Cronk OBJECTED for discussion.
Representative Josephson explained the amendment. He had
noticed several days ago that due to the ticking clock, the
committee would not be able to discuss all five or six oil
bills that were currently proposed. The amendment would
incorporate HB 388 [relating to Cook Inlet reserve-based
lending] which would authorize AIDEA to assist in the
financing of projects in Cook Inlet to improve the odds of
gas production. He directed attention to page 3, lines 29
to 31 of the amendment, which stated that the authority
could use money in the fund to make one or more reserve-
based loans to fund oil and gas development. The amendment
would offer another tool and was a pro-development
amendment.
Mr. Valdez responded that the amendment was written
slightly differently than HB 388. He understood that the
amendment would expose AIDEA's entire balance sheet to
risk, unlike HB 388. There were a few significant
differences that set that amendment apart from HB 388. He
thought it would also compromise the financial integrity of
the authority's credit rating due to management and general
fund appropriations.
9:36:22 PM
Representative Cronk asked if anyone from AIDEA was
available to speak on the amendment.
BRANDON BREFSCZYNSKI, DEPUTY DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY (via teleconference),
explained that when HB 388 moved out of the House Resources
Committee, an amendment was added to grant AIDEA the
ability to establish a subsidiary across all of its funds.
The primary fund under AS 44.88.172 was the revolving fund.
Additional funds included the Sustainable Energy Transition
and Supply (SETS) and the Arctic Infrastructure Development
Fund (AIDF), both of which were created after AIDEA was
given the authority to establish subsidiaries. He clarified
that the HB 388 amendment allowed AIDEA the flexibility to
create subsidiaries across all funds, which was useful. He
expressed appreciation to Representative Josephson for
bringing the amendment forward and emphasized that AIDEA
supported adjusting the language to enable subsidiaries
across all funds.
Mr. Brefsczynski continued, noting that the second point
concerned general fund appropriations and AIDEA's credit
rating, particularly in relation to the reserve-based fund.
He explained that if the legislature made a general fund
appropriation to the reserve-based lending fund,
restrictive language would prevent AIDEA from moving money
within that fund. The restriction could potentially harm
AIDEA's credit rating. He cited 2019 as the most recent
instance where AIDEA's credit rating was negatively
impacted due to funds not part of AIDEA's dividend being
spent or moved. The event led to a two-step credit
downgrade and a negative credit outlook. He clarified that
if funds were moved around without being used, it could
have similar effects. However, AIDEA would not object to
general fund appropriations like those provided in 2013
through HB 105 for the interior trucking and gas project.
He indicated that he wasn't currently concerned about
transferring funds, as it would require an appropriation in
a separate budget bill.
9:40:53 PM
Representative Coulombe inquired what Representative
Josephson hoped to achieve through the Cook Inlet Oil and
Gas Development Project Report.
Representative Josephson responded that the amendment
provided the answer. He explained that AIDEA would be
required to submit an annual report to the legislature,
including a review and testimony on its investments in Cook
Inlet.
Representative Hannan asked Representative Josephson to
confirm whether he intended to incorporate HB 388 into the
bill.
Representative Josephson responded in the affirmative. He
recalled that the state's top attorney on oil and gas
matters had made changes solely due to concerns about the
single-subject rule.
Representative Hannan asked what the legislature needed to
address in the amendment to align it with HB 388,
particularly regarding Cook Inlet.
Mr. Brefsczynski Mr. Brefsczynski explained that there were
two separate issues. The first issue was the reserve-based
lending fund, which was the initial focus of HB 388 and
would be addressed by the amendment. He clarified that HB
388 was initially designed to grant AIDEA the ability to
establish subsidiaries across all its funds. However, the
amendment would only apply to the revolving fund and the
economic development account. He proposed that the ability
to establish subsidiaries be expanded.
Representative Hannan asked for clarification on which page
and line Mr. Brefsczynski was referring to.
Mr. Brefsczynski responded that he was referring to page 2,
line 24 of the amendment. He suggested deleting content
under AS 44.88.172 and adding the phrase "by the
authority." The change would align the amendment with the
objectives of HB 388.
Representative Josephson acknowledged that AIDEA had
expressed interest in receiving an infusion of general fund
dollars. However, he believed Mr. Brefsczynski was
requesting additional power for AIDEA, while Representative
Josephson's goal was for AIDEA to focus on developing the
Cosmopolitan field or other related fields, rather than
expanding its powers.
Co-Chair Edgmon suggested that the maker of the motion
might not fully understand the amendment.
Co-Chair Foster understood that Representative Josephson
would like to keep the amendment as it was.
Representative Josephson responded in the affirmative.
Representative Hannan clarified that AIDEA was indicating
the amendment was significantly different from HB 388.
After the additional discussion, she now understood the
distinction. The amendment was specifically tailored to
apply to the reserve-based lending for Cook Inlet.
Mr. Brefsczynski responded that for the sake of time, he
would be happy to have the conversation offline. He
clarified that the goal was not to expand AIDEA's power but
to protect its assets while making investments. He noted
that the approach was similar to how other companies might
establish LLCs or special purpose vehicles for investments.
9:48:16 PM
AT EASE
9:49:17 PM
RECONVENED
Co-Chair Foster noted that Emily Nauman from Legislative
Legal Services (LLS) was online and could provide
additional information.
9:49:47 PM
EMILY NAUMAN, DIRECTOR, LEGISLATIVE LEGAL SERVICES (via
teleconference), reiterated Representative Josephson's
point about expanding AIDEA's power to allow it to create
subsidiaries across various funds. If the amendment were
expanded as Mr. Brefsczynski suggested, it would likely
violate the single-subject rule by addressing more than one
subject.
Representative Hannan asked for confirmation that the
amendment as drafted would not bring any single subject
concerns of violation.
Ms. Nauman responded in the affirmative.
9:51:40 PM
AT EASE
9:52:19 PM
RECONVENED
Co-Chair Edgmon shared his understanding that Amendment 6,
which sought to eliminate oil from the bill, initially
passed with a vote of 8/3 but later failed following a
dissent motion, which resulted in a vote of 5/6`. He
understood that Amendment 15 related to state loans for oil
and gas development projects in Cook Inlet, and that the
bill had now evolved into a comprehensive oil and gas bill.
Representative Josephson responded in the affirmative. He
clarified that the amendment was not primarily focused on
royalty relief but was specifically about granting AIDEA
the power to use reserve-based lending in Cook Inlet. He
expressed particular interest in the proposal and
acknowledged that some royalty relief would likely be
included. He also noted that he did not expect HB 388 to be
taken up during the current session and offered the
amendment as an alternative for the legislature to
consider.
Co-Chair Edgmon expressed surprise at the process, noting
that he did not fully understand the concept. While he
agreed that it was unlikely HB 388 would be addressed, he
felt that combining it into HB 223 would effectively create
an omnibus bill. He was uncomfortable with his level of
understanding of the bill's contents. He questioned why the
committee was not considering combining the next bill on
the agenda into HB 223 as well, to accomplish everything in
a single evening. He was confused and surprised at the
manner in which the bills were being combined.
Representative Cronk MAINTAINED the OBJECTION.
9:56:01 PM
A roll call vote was taken on the motion.
IN FAVOR: Stapp, Cronk, Coulombe, Galvin, Josephson,
Tomaszewski
OPPOSED: Hannan, Ortiz, Edgmon, Foster, Johnson
The MOTION PASSED (6/5). There being NO further OBJECTION,
Amendment 15 was ADOPTED.
9:57:14 PM
Co-Chair Foster explained that the intent was to
incorporate all changes made to the bill into a CS.
Representative Rauscher expressed appreciation for the
committee's time spent on the bill and looked forward to
reviewing the CS.
HB 223 was HEARD and HELD in committee for further
consideration.
9:59:20 PM
HOUSE BILL NO. 119
"An Act relating to marijuana taxes; and providing for
an effective date."
10:00:12 PM
REPRESENTATIVE JESSE SUMNER, SPONSOR, explained that the
bill was essentially a change in the marijuana tax
structure.
Co-Chair Foster noted that there were 13 fiscal notes.
BRANDON SPANOS, ACTING TAX DIRECTOR, DEPARTMENT OF REVENUE,
TAX DIVISION, ANCHORAGE (via teleconference), reviewed the
fiscal note from the Department of Revenue (DOR) with
control code wrLQD. The department estimated that the
change in the rate from $50 per ounce to $12.50 per ounce
would reduce current revenue by $18.3 million in the first
full fiscal year after implementation. The department
projected that moving from the $12.50 per ounce wholesale
transfer rate to a sales tax of 3 percent in FY 29 would
result in a further decrease of $27.6 million in FY 29. The
estimates assumed no inflation for fiscal note purposes.
Mr. Spanos explained that the bill also changed the
allocation of tax revenue. Currently, the revenue was split
between three funds: the Recidivism Reduction Fund (RRF),
which held 50 percent of the revenue, and the Marijuana
Education and Treatment Fund (METF) and the Unrestricted
General Fund (UGF), which each received 25 percent. The
bill changed the allocation to 100 percent of the revenue
being deposited into METF, and the revenue could be
appropriated from that fund for the following three
different purposes, with no more than 33 percent allocated
to each: the Department of Health (DOH) for a comprehensive
marijuana use education and treatment program, the
Department of Commerce, Community, and Economic Development
(DCCED) to support administrative tasks related to the
cultivation, manufacturing, and sales of marijuana and
marijuana products, and to the general fund.
Mr. Spanos explained that on page one of the fiscal note, a
table had been included to show all three funds and the
department's projections. The bill initially required only
minor changes to be implemented, as the change from $50 per
ounce to $12.50 per ounce was straightforward with no
implementation cost. However, the change to a 3 percent
sales tax in FY 29 would involve more significant costs.
The change would introduce a new sales tax system, which
was not currently in place in the state, and would require
the development of a new module in the tax revenue
management system, as the old taxes would be eliminated.
However, the department did not need to hire additional
staff, as current staff could absorb the work, though
enforcement functions would require travel, which would be
accounted for. He had noted in a previous letter to the
committee that the current effective date was tight. The
department routinely stated that whenever there was a large
change to the tax revenue management system, it would need
12 to 18 months to implement the change. The estimated
implementation cost had originally been $1 million, but it
had been updated to $2 million because of the short
timeframe. If the effective date was pushed back by at
least 12 months, the cost would return to $1 million.
10:04:46 PM
Mr. Spanos was available for questions.
Co-Chair Foster asked if Mr. Spanos was reading from the
fiscal note with OMB component number 2476.
Mr. Spanos responded that he realized he was not reading
from the correct fiscal note.
Representative Hannan noted that the date on her fiscal
note was dated January 22, 2024. She asked if she had an
old version of the fiscal note or if it was the most
current version.
Co-Chair Foster stated the date on the correct and most
current fiscal note was April 11, 2024 with OMB component
number 2476 and control code wrLQD. He asked if
Representative Hannan had the same version.
Representative Hannan responded that she did not.
Co-Chair Foster asked which version Mr. Spanos had been
referencing.
Mr. Spanos responded that he was looking at a version in
Excel which did not have a component number.
10:06:16 PM
AT EASE
10:07:08 PM
RECONVENED
Co-Chair Foster noted the OMB component number 2476 was the
correct version of the note.
Mr. Spanos relayed that he had the correct version of the
note.
Co-Chair Foster asked for confirmation that Mr. Spanos had
the fiscal note with OMB component number 2476 if it was
correct.
Mr. Spanos replied affirmatively.
10:07:56 PM
JOSEPHINE STERN, ASSISTANT COMMISSIONER, DEPARTMENT OF
HEALTH (via teleconference), reviewed the fiscal note by
DOH with OMB component 3099 and control code uljnX.
Co-Chair Foster asked for a repeat of the component number.
Ms. Stern replied 3099.
Co-Chair Foster asked for the control code. He noted that
the version of the fiscal he had was dated January 24,
2024. He asked what the date was on Ms. Stern's version.
Ms. Stern replied April 15, 2024.
10:09:30 PM
AT EASE
10:12:01 PM
RECONVENED
Co-Chair Foster noted that the committee was considering
OMB component 3099.
Ms. Stern relayed that the fiscal note was based off of
DOR's projections for the Behavioral Health Treatment and
Recovery Grant (BHTRG) and the allocation that DOH received
every year. Based off of DOR's projections, BHTRG was
estimated to collect a total of $3,791,800 in revenue in FY
2025, which was split between the RRF, which was estimated
to be a reduction of around $2,021,500, and the METF, which
was reduced by around $1,770,300 dollars. In the out years,
the amounts were estimated to decrease due to inflation,
market growth, and population growth. The amounts in the
out year fiscal notes had been adjusted accordingly based
off of DOR's fiscal notes. The reductions would affect the
grants that the component issued out on an annual basis.
Co-Chair Foster asked if there were any questions on the
fiscal note. After seeing none, he noted the committee
could return to any fiscal notes at any time.
Ms. Stern reviewed the next fiscal impact note prepared by
DOH with OMB component 2665 and control code MQbaD. The
note was based on the DOR fiscal notes and the annual
allocation that was distributed to DOH under the Behavioral
Health Administration (BHA). Based on DNR's fiscal note and
the allocation that the component received on an annual
basis, the estimated production in FY 25 was projected to
be a decrement of $154,900, of which $87,800 was from RRF
and $67,100 was from METF. The amount was set to decrease
over the subsequent years due to inflation, market growth,
and the population growth. The funds in the fiscal note
were used related to contracts that promoted education and
treatment related to marijuana.
10:16:13 PM
Representative Galvin understood that the fiscal note was
addressing funds that were divided between DOH and
prevention programs. She asked if the prevention programs
would receive less funding than usual, and if so, how long
would the funds be reduced.
Ms. Stern responded in the affirmative. The funds were used
to issue grants for after school youth services and to
communicate messages to help prevent youth marijuana use
and educate the public about marijuana. The activities were
purely based off of the revenue that was collected through
marijuana taxes. If there was a decrease in the revenue
collected, the grant program would either become smaller or
the department would need to request additional funds or
supplement with existing resources.
Representative Galvin explained that her understanding was
that the revenue source was being changed to be sourced
from the sales tax at the consumer level. She thought that
municipalities such as Anchorage had similar prevention
programs that were funded through marijuana sales. She
asked if there might be supplanted funds going through the
programs.
CLARK BICKFORD, STAFF, REPRESENTATIVE JESSE SUMNER,
deferred the question a representative from the governor's
task force.
BRANDON EMMETT, CHAIRMAN, GOVERNOR'S TAX TASK FORCE ON
RECREATIONAL MARIJUANA AND HEMP, FAIRBANKS (via
teleconference), asked for Representative Galvin to repeat
the question.
Representative Galvin complied.
Mr. Emmett responded that municipalities currently
collected monies that went into the general fund and were
appropriated at the purview of the municipality. In
Fairbanks, the funds were used for emergency medical
services, the road system, and schools. The decrement in
the wholesale tax would be offset by the implementation of
a retail tax, which had been illustrated in some of the
projections that were done by House Majority staff member
Cody Rice. The projections showed that because of the
manner in which taxpayers had been paying the taxes, the
decrease with the status quo in the wholesale market would
be in excess of what the change would be if it became a
retail tax. In the short term, the taxes collected by a
decrease at wholesale would be a reduction, but in the long
term, it would be an increase in total revenue to the state
according to all projections.
10:22:29 PM
Ms. Stern reviewed the fiscal impact note prepared by DOH
for the Division of Public Health relating to OMB component
2818 and with the control code ilSLR.
Co-Chair Foster asked for a repeat of the component number.
Ms. Stern complied. The fiscal note was based off of the
DOR fiscal note which projected a decrease in revenue. The
projected decrease for DOH under Chronic Disease Prevention
and Health Promotion was estimated to be a total decrease
in FY 25 of $1,082,700 from METF. The number was estimated
to decrease in subsequent fiscal years, due to inflation,
market growth, and population growth. The funds were also
used for grants for outreach and education, as well as
training for education programs related to marijuana.
10:24:46 PM
Co-Chair Foster moved to the Department of Corrections'
(DOC) fiscal notes.
TERI WEST, ADMINISTRATIVE SERVICES DIRECTOR, DEPARTMENT OF
CORRECTIONS (via teleconference), relayed that DOC had
seven fiscal notes. She started with the fiscal impact note
with OMB component number 2244 and with the control code
vUQRd. She clarified that the fiscal note was dated April
23, 2024. She asked if members had the same fiscal note on
hand.
Co-Chair Foster confirmed that he had the correct fiscal
note.
BRODIE ANDERSON, STAFF, REPRESENTATIVE NEAL FOSTER,
requested that the appropriation name be stated.
Co-Chair Foster replied that it was the community
residential centers. He asked Ms. West to detail the fiscal
notes.
Ms. West explained that the fiscal note had been updated to
incorporate the changes from the CS and updated to align
with the Spring 2024 Revenue Forecast from DOR. The fiscal
note reflected a fund source change from RRF to UGF in FY
25 totaling $351,000. The reduction in the revenues were
seen in the out-year cost estimates. The funds were used to
support successful re-entry efforts within the community
residential center.
10:26:57 PM
Ms. West moved to DOC's next fiscal impact note with OMB
component number 2952 for Health and Rehabilitation
Services with the control code wGflU. The fiscal note was
incorporating changes from the CS to align with the DOR
Spring 2024 Revenue Forecast. There was a fund source
change from RRF to UGF in FY 25 in the amount of $1,232,800
with the amounts reducing through the out-year. The funds
were used to support medical services within the physical
health care component.
Co-Chair Foster invited Ms. West to move to the next fiscal
note.
Ms. West moved to DOC's next fiscal impact note with OMB
component 2971 for education programs with the control code
JepWS. The fiscal note again incorporated changes from the
CS and updates to align with the DOR Spring 2024 Revenue
Forecast. There was another fund source change from RRF to
the general fund in the amount of $290,300 in FY 25 with
reductions in the out-year cost estimate. The funds
supported the educational programming within the
department.
Ms. West advanced to DOC's next fiscal impact note with OMB
component 2972 for vocational education programs with the
control code WFsFW. The fiscal note again incorporated
changes from the CS to align with the DOR Spring 2024
Revenue Forecast. There was a fund source change from RRF
to general funds in the amount of $212,700. The funds were
utilized for the vocational programming efforts.
10:31:10 PM
Ms. West addressed the next DOC fiscal impact note with OMB
component 2973 with control code OkmVr. The note
incorporated the changes from the CS and was updated to
reflect the DOR forecast. There was another fund source
change from RRF to general funds in the amount of $61,400.
The funds were used to support domestic violence programs.
Ms. West spoke to DOC's next fiscal note with OMB component
number 2975 for sex offender management programs and
control code UgGFA. The note incorporated the changes in
the CS and the DOR forecast. There was another fund source
change from RRF to general funds in the amount of $702,000
with decreased amounts in the out years. The funds were
again used to support the sex offender treatment programs
within the department.
Ms. West reviewed the next DOC fiscal impact note with OMB
component 3080 for recidivism reduction grants with the
control code hYouo. The note incorporated changes from the
CS and was updated to align with the DOR forecast. There
was another fund source change from RRF to general funds in
the amount of $776,900 with decreasing amounts in the out
years. The funds were utilized for reentry efforts. She
relayed that she had no more fiscal notes.
Representative Galvin asked about the total for all of the
fiscal notes.
Representative Coulombe pointed out that the second page of
all of the fiscal notes showed the total for all of the
notes from DOC.
Co-Chair Foster recognized the legislative liaison for DOC
was available for questions.
10:36:11 PM
LESLIE ISAACS, LEGISLATIVE LIAISON, DEPARTMENT OF
ADMINISTRATION (via teleconference), reviewed the zero
fiscal note from the Department of Administration (DOA)
with OMB component number 59 and the control code LUNwZ.
The Division of Finance managed the funds within the
state's accounting system and did not anticipate that the
bill, as amended, would have a meaningful impact on the
workload.
PAM HALLORAN, ADMINISTRATIVE SERVICES DIRECTOR, DEPARTMENT
OF PUBLIC SAFETY (via teleconference), reviewed the fiscal
impact note from the Department of Public Safety (DPS) with
OMB component number 521 and control code yBSRc. The
allocation was for the Council on Domestic Violence and
Sexual Assault (CDVSA). The note incorporated the changes
from the CS and the DOR forecast. There was another fund
source change from RRF to general funds in the amount of
$702,000, with reduced amounts in the out years. The funds
were used to support the sex offender treatment programs
within the department, and the RRF would be reduced
slightly by $360,000, with a further decrease in the out
years. The department used RRF for grants and programs to
support domestic violence prevention efforts by CDVSA.
Mr. Bickford requested that Mr. Rice be brought up for the
amendment portion.
10:40:08 PM
AT EASE
10:41:13 PM
RECONVENED
Co-Chair Foster related that the committee would now hear
the four amendments on the bill.
10:42:05 PM
AT EASE
10:42:33 PM
RECONVENED
Representative Josephson MOVED to ADOPT Amendment 1, 33-
LS0636\U.4 (C.Radford, 4/30/24) (copy on file). [Due to the
length of the amendment, it was not included in the
document. Please see the copy on file for details.]
Representative Stapp OBJECTED for discussion.
Representative Josephson explained the amendment. The tax
had been based on the cultivator, with three types of
taxes: high grade, medium grade, and low grade. The bill
intended to shift to a pure retail tax, which was a process
used by some other states. If the bill passed, Alaska would
become the state with the lowest retail tax. The amendment
would reduce the $12.50 per ounce wholesale transfer rate
to $10. He believed that the cultivator should have some
"skin in the game." The amendment would eliminate the
complaint regarding the reluctance to be fully transparent
about the product mix because the product mix would no
longer be relevant. He thought it would benefit the
cultivator significantly, as the tax would drop
dramatically. The effective tax rate would decrease from
$800 per pound to $160 per pound.
Representative Josephson shared that according to a Green
Market Report, the average price of cannabis in Alaska was
$2,400 per pound, which was $300 per pound higher than in
the next closest state. The $800 per pound excise tax at
wholesale had been considered a primary factor contributing
to the high cost of cannabis in the state. The proposed
change would reduce the price of cannabis by $800, bringing
it down to about $1,600 per pound. The process would begin
with a cheaper product, making cannabis more affordable.
While Alaska would still have one of the highest costs per
pound, it would no longer have the highest. He clarified
that the amendment was related to the retail rate because
he was also proposing a retail tax.
10:46:26 PM
Co-Chair Foster asked for a comment from the sponsor.
REPRESENTATIVE JESSE SUMNER, SPONSOR, did not support the
amendment. He believed that it would result in a
substantial tax increase for the entire industry. He
considered the amendment inadvisable for many reasons, and
stated that if the amendment passed, he would withdraw the
bill the following day. He suggested that Mr. Rice could
explain.
CODY RICE, STAFF, HOUSE MAJORITY, explained that the
amendment would cause a roughly 42 percent tax increase. He
suggested that there was a possibility that it would result
in a reduction in tax revenue and drive as much as 200,000
to 300,000 ounces per year to the black market based on the
price elasticity demand effects of the tax increase.
Representative Sumner shared that within the last day, the
federal government had announced that it would be
rescheduling marijuana from a Schedule 1 substance, which
was likely a first step along the road to legalization. A
cultivator tax would destroy all Alaskan industry because
it would not be able to compete with an untaxed out-of-
state market. The state would need to switch to a retail
tax if there was federal legislation, and he thought the
state should get ahead of the eventuality of legislation.
10:48:43 PM
Representative Josephson thought Representative Sumner's
comment that he would pull the bill was a little
manipulative, especially considering the late hour. The
industry had indicated that it needed change, and the bill
was described as a tax increase. He was not sure what part
of the bill proposed a tax increase because it appeared to
him to be a massive tax cut. He understood that DOR had
reported that the state currently received about $28
million per year in tax. He wondered what the state would
receive in FY 25 if an 8 percent retail tax were
implemented.
10:50:41 PM
AT EASE
10:51:39 PM
RECONVENED
Representative Josephson clarified that he had asked DOR to
do an analysis on his amendments. The department reported
that the state would receive $25.6 million under his
collective amendments and as little as $23 million under
the 8 percent sales tax. He understood that DOR reported
that combining a 10 percent cultivator's tax with an 8
percent retail tax would result in a $5 million tax cut. He
was mainly concerned because the committee had recently
been presented with a "nightmare" of fiscal notes that
would gut all manner of programs totaling $20.5 million. He
did not know how to replace all of the income for all of
the programs, but he was trying to alleviate the issue by
implementing the reduction to the cultivator's tax. The
committee could reject all of the amendments or choose, for
example, an 8 percent tax or 10 percent tax. He understood
that the House Labor and Commerce Committee examined the
idea of implementing a 10 percent tax, which might seem
high, but as a comparison, California and Colorado had a 15
percent excise tax and Maine and Michigan had a 10 percent
tax. He reiterated that if a 6 percent tax was implemented
in Alaska, it would be the lowest tax of its kind in the
country. He wanted to share what he had learned on the
topic even though the bill had been introduced late in the
session.
10:54:42 PM
Co-Chair Edgmon remarked that it was hard to compare Alaska
to other states because of the growing season and expensive
nature of Alaska. He thought the tax provision in the bill
seemed fair and he even saw an argument for reducing the 6
percent rate further. He thought the change to the
cultivator tax would restructure the entire bill.
Representative Josephson commented that there were other
states that had implemented a mixed system. For example,
Maine had a tax of $335 per pound on flower, $94 per pound
on trim, $1.50 per immature plant or seedling, and $0.03
per seed. There were different ways to structure the
system. His office's research indicated that the comments
about the black market were overstated and speculative.
Co-Chair Edgmon thought the amendment structurally changed
the bill.
Mr. Rice agreed with Co-Chair Edgmon. The tax in Alaska was
more expensive than the actual wholesale cost of a pound of
cannabis in several other states. For example, Maine had a
small and immature market. He took some issue with the
description of the tax reduction. He clarified that the
weighted average tax was not the $50 headline tax that was
often discussed. The weighted average tax was substantially
lower because of the changing product mix, and it had been
declining every year. He thought $19 was more appropriate
as the base if one were to examine the tax on a weighted
average basis.
Representative Josephson relayed that the cultivator would
receive a tax cut of nearly 50 percent if the amendment
were to pass. He noted that DOR agreed that it was a tax
cut. If HB 119 resulted in a 20 percent increase in sales
and there was a 5 percent growth rate, the state might
reach $28 million again in around ten years. He thought it
was a policy call. He did not think there was anything
particularly "magic" about the 6 percent figure and it
would be one of the lowest tax rates in the country. The
proposal to reduce the cultivator's tax was a structural
change.
10:59:09 PM
Co-Chair Edgmon understood that the industry was at a
tipping point according to the testimony he had heard. He
thought that reinstituting the cultivator's tax could make
or break many businesses and many could find it too
expensive. The bill seemed to be reasonable from the angle
of economic development and growth and changing the bill
drastically would cast doubt.
Representative Galvin wanted clarification on what the
amendment would do. She asked if the amendment would tax
the cultivator.
Representative Josephson clarified that the amendment would
not apply an additional cultivator tax, it would reduce the
tax on cultivators. The product would be weighed on a scale
and would be priced at $10 per ounce. There was an
expectation that the cultivator's tax would be eradicated,
but it was not his personal expectation.
Representative Galvin asked whose scale would be used to
weigh the product.
Representative Josephson answered it would be the farmer's
scale.
Co-Chair Edgmon called the question.
[Although not explicitly stated, the objection was
maintained.]
A roll call vote was taken on the motion.
IN FAVOR: Josephson, Ortiz
OPPOSED: Stapp, Galvin, Coulombe, Tomaszewski, Hannan,
Cronk, Edgmon, Foster
Co-Chair Johnson was absent from the vote.
The MOTION to adopt Amendment 1 FAILED (2/8).
11:02:36 PM
Representative Josephson MOVED to ADOPT Amendment 2, 33-
LS0636\U.2 (C.Radford, 4/30/24) (copy on file):
Page 5, line 11:
Delete "six"
Insert "10"
Representative Stapp OBJECTED.
Representative Josephson explained that the amendment would
increase the sales tax rate from 6 percent to 10 percent.
On a $5 pre-roll, or a "joint," a 10 percent tax would add
$0.50. He understood that consumers would purchase the
joint for $5, but not for $5.50. On a $14 pre-roll, a 10
percent tax would add $1.40. The tax rate of 10 percent was
still relatively low compared to other states and would
still be considered a tax reduction.
Representative Sumner stated it was a policy call for the
committee. He had originally proposed a 3 percent tax but
had later increased it to 10 percent. He believed that 6
percent was appropriate. He deferred to Mr. Rice for
further details.
Mr. Rice stated that he viewed it as a tax increase. He
disagreed with some of the assumptions and modeling used by
the Department of Revenue (DOR), but he noted that DOR's
status quo model predicted that the average effective tax
rate would be below 9 percent during the forecast period.
He explained that the volume of consumption was also a
critical factor to consider. While the tax on an individual
pre-roll or joint might not be significant, the price
elasticity of demand varied depending on consumption
levels. He clarified that individuals who consumed the most
cannabis were the most sensitive to price changes. His
personal model suggested that the amendment would result in
a $17 million reduction in tax revenue, driven by a 21
percent to 36 percent reduction in demand for legal
cannabis. He assumed that most of the reduced demand would
shift to the black market.
11:06:18 PM
Representative Stapp opposed the amendment. He believed
that the committee had thoroughly discussed the modeling.
He appreciated the data provided by Representative
Josephson regarding larger and smaller joints. He noted
that he had always wondered about the difference between a
joint and a blunt, and he asked Representative Josephson to
clarify the difference and whether the tax structure would
vary accordingly.
Representative Cronk opposed the amendment. He suggested
that the way to increase taxes on marijuana was to
encourage more people to buy it. The price needed to be
lowered because there was marijuana on the black market and
it was likely cheaper than what was sold in stores. If the
goal was to increase revenue, the price needed to be
reduced.
Representative Coulombe understood that the tax had been
proposed at 3 percent, 10 percent, and 6 percent. She asked
what was the "magic number" to keep it neutral.
Mr. Rice responded that after discussions with DOR, the tax
neutrality number that his model produced was 6.5 percent.
Representative Galvin noted that the committee had an
earlier discussion on pancaking taxes. She remarked that
the tax percentage in the bill had changed many times but
the number that was currently proposed was 6 percent. She
understood that Bethel had a 15 percent tax already. She
asked if the taxes were going to be compounded on top of
each other.
11:09:23 PM
Co-Chair Foster noted that the director of the Alcohol and
Marijuana Control Office (AMCO) was available online for
questions.
Mr. Rice did not recall off the top of his head what
Bethel's tax rate was, but he knew it was high. He
clarified that the 6 percent tax would be in addition to
existing taxes.
Representative Galvin highlighted that if the tax rate was
moved to 10 percent, Bethel's tax would change to 25
percent. She thought that it would change the modeling
considerably for the consumer who was spending, for
example, around $150 per week. She was trying to highlight
that some areas of the state had higher tax rates than
others. She appreciated that the amendment was trying to
recoup some revenue because the presentation of the fiscal
notes and lost revenue was frightening. She was trying to
evaluate the decisions because the programs that would be
cut were important to small communities throughout the
state that already had a sales tax higher than 10 percent.
JOAN WILSON, DIRECTOR, ALCOHOL AND MARIJUANA CONTROL
OFFICE, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC
DEVELOPMENT (via teleconference), responded that she talked
to cultivators every month who were trying to decide
whether to stay in business. While there may be concerns
about the reduction in the taxes, there was a high
likelihood that a number of cultivators would continue to
go out of business. She hoped that the committee could
balance the survivability of the industry until the state
could implement a retail tax that would tax not just the
plant, but products coming from the plant. There were 231
cultivators in Alaska and 178 stores. The cultivators had a
reason to be responsive to price and there had been a huge
impact in just the seven years that the industry had been
in place in the state. She explained that the governor's
task force had debated all of the issues and the bill
represented the consensus model of the 15 members.
11:13:37 PM
Representative Josephson asked Mr. Rice how he accounted
for the massive loss in revenue in the programs.
Mr. Rice replied that he was not certain what
Representative Josephson meant. Tax neutrality referred to
the status quo and there was no loss at the status quo tax
rate other than the short-term immediate loss from the
reduction that was quickly made up with larger revenues at
6.5 percent.
Representative Josephson did not think Mr. Rice's
explanation was supported by the fiscal notes or testimony
he had heard from Dan Stickel, the chief economist at DOR.
Representative Sumner clarified that DOR had presented a
number of different scenarios to the committee and what was
reflected in the fiscal notes was the absolute worst case
scenario. He understood that DOR projected that there was
not much certainty but the modeling he had done most
recently was more accurate.
Co-Chair Edgmon relayed that the initiative that created
the status quo 6 percent program passed in 2014 and it had
been 10 years. He thought the initiative was fairly generic
and broad. He remembered that 10 years ago, there were
comments warning against letting time pass without checking
in and making sure that there was a balance point between
supply and demand. The task force had spent a lot of time
discussing the bill and it was a "make or break" bill. The
6 percent rate attempted to achieve a balance point. He
thought that a 3 percent tax might be more akin to building
more businesses throughout the state. He thought marijuana
was unlike the alcohol industry and he did not think it was
a mature industry. He thought the legislature should follow
the task force's recommendations. He would be opposed to
any amendments.
Representative Hannan shared that her thoughts were similar
to those expressed by Co-Chair Edgmon. When she initially
heard about the bill, her concern was that a revenue stream
had been created from the designated revenue. The committee
had just discussed HB 223, which would eliminate higher
amounts of revenue to encourage keeping Alaskans warm in
their homes. However, lost revenue was not discussed
because there was no dedicated stream. The legislature had
tied marijuana taxation to specific programming to
illustrate its moral and ethical concerns about the
industry. For example, the concern about a potential uptick
in juvenile delinquency and addiction was addressed by
allocating money to drug prevention programs. However, if
the discussion was about the industry in Alaska, she
believed that maintaining its functionality was more
important than the lost revenue. She urged the committee to
recognize that it would need to address the funding of the
programs through other UGF over the next few years if the
committee wished to ensure the continuation of the
programs. She understood that the primary concern had been
the potential loss of those programs. She asserted that the
responsibility did not lie with the tax; it was, instead,
the broader responsibility of the legislature.
Representative Hannan opposed the amendment because, as
Representative Edgmon had stated, the marijuana businesses
were Alaskan businesses and the workers were Alaskans,
unlike the oil industry where 40 percent of the workforce
was non-Alaskan. Due to the unique banking challenges faced
by the businesses, it was not possible to purchase goods
from out of state and transport them to Alaska. The
businesses were instead procuring goods, services, and
support within Alaska. The ripple effect of the industry
had a greater impact in local communities.
11:21:01 PM
Representative Tomaszewski asked if Mr. Rice had been
referring to the old calculations of $50 an ounce, $25 an
ounce, and $15 an ounce for the good, medium, and poor
grades in relation to the new tax structure proposed in the
bill.
Mr. Rice responded that Representative Tomaszewski's
assumption was correct. He explained that the 6.5 percent
parity referred to his forecast for the status quo.
Representative Tomaszewski asked if Mr. Rice had taken into
account the steady decline in the amount of the $50-an-
ounce product, and whether the decline had been calculated
or projected in his analysis.
Mr. Rice reiterated that Representative Tomaszewski's
observation was completely correct. He added that the
steady and predictable decline in the highest-taxed
cannabis products was a key area of differentiation between
his assumptions and modeling, and the modeling from DOR.
Representative Tomaszewski argued that, given that
manufacturers applied their own tax to products sold to
retail stores, the new tax structure of 6.5 percent would
likely result in a significant increase in tax revenue. The
product being sold at retail locations would likely be of
higher quality, as he did not believe a large amount of
low-quality trim would be sold to retail stores. When he
considered the steady decline in high-grade products, he
assumed that some products, although not the highest
quality, were likely still of a higher grade. He argued
that with the new tax structure, 6.5 percent would generate
higher tax revenue than before, based on the fact that the
grading system would differ under the new structure
compared to how it had been previously done. He concluded
that he would oppose the amendment.
11:24:05 PM
Representative Josephson remarked that it was interesting
that Mr. Rice had taken issue with DOR's modeling. He
explained that Mr. Stickel was the person the legislature
relied upon for modeling. He explained that Mr. Stickel had
provided a generous and favorable modeling line for the
bill, including a 20 percent increase in sales after the
tax change and a 5 percent growth rate. He noted that Mr.
Stickel was one of the most talented people in DOR and when
the department needed precision, it turned to Mr. Stickel,
particularly when establishing tax rates and modeling for
oil and gas.
Representative Cronk MAINTAINED the OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Josephson, Ortiz
OPPOSED: Tomaszewski, Cronk, Galvin, Hannan, Coulombe,
Stapp, Foster, Edgmon
Co-Chair Johnson was absent from the vote.
The MOTION to adopt Amendment 2 FAILED (2/8).
11:25:52 PM
Representative Josephson MOVED to ADOPT Amendment 3, 33-
LS0636\U.3 (C.Radford, 4/30/24) (copy on file):
Page 5, line 11:
Delete "a six"
Insert "an eight"
Representative Cronk OBJECTED.
Representative Josephson MOVED to ADOPT conceptual
Amendment 1 to Amendment 3. He explained that the
conceptual amendment would insert "seven percent" on line
3.
There being NO OBJECTION, it was so ordered. Conceptual
Amendment 1 to Amendment 3 was ADOPTED.
11:26:24 PM
Representative Josephson explained Amendment 3 as amended.
He understood that Representative Stapp had a fiscally
conservative stance and pointed out that there was a $20
million revenue deficit from the bill, which would shrink
slightly over time but remain into the 2030s. He added that
a 7 percent excise tax would be the lowest in the country.
Representative Stapp understood that Representative
Josephson had been describing the different tax structures
for various marijuana products. He inquired if there were
additional variations to consider. He explained that while
he did not oppose having the lowest excise tax in the
country, he felt the underlying bill would generate less
tax revenue than the amendment would. As a fiscal
conservative, he was uncomfortable with raising taxes.
Representative Cronk thought that to increase tax revenue,
more customers would need to be brought into the stores.
Keeping prices high would not achieve that goal. As an
analogy, if a hotel charged $300 per night, the hotel might
only get a few customers, but at $150, the hotel could
attract many more, ultimately making more money. He
concluded by stating that he opposed the amendment.
Representative Ortiz asked if there was data to show that
the market share of the black market had been steadily
increasing since the legalization of marijuana in 2014, and
whether the legal retail market was continuing to lose
ground to illegal sales. He asked if there was any data on
the trend.
Mr. Rice responded that he had attempted multiple methods
to quantify the black market and had come up with a variety
of numbers, all of which were quite large and consistent
with research from other states. He noted that the key
driver of the market shift, as he had previously described,
was the change in the product mix. He explained that the
highest-quality cannabis, defined as bud at $50 an ounce,
had steadily decreased in availability, while lower-quality
products had increased. The shift had led to a reduction in
the weighted average tax rate and would ultimately lead to
a decrease in the total tax revenue collected by the state.
He expected the trend to continue.
Representative Ortiz acknowledged Mr. Rice's response,
stating that it was sufficient for the time being.
Mr. Bickford suggested that the committee could benefit
from hearing additional input from either Ms. Wilson or Mr.
Emmett.
Ms. Wilson explained that while she had not been able to
quantify the black market, she could provide an example.
She recounted a case from the current year in which a
manufacturer unlawfully brought $3 million worth of THC oil
into Alaska from California, avoiding taxation. The product
was untested, and little was known about its source. She
stressed that there were many ways people tried to bypass
taxes, creating risks to the public's safety.
11:30:53 PM
Mr. Emmett replied that one could easily go online and find
marijuana that was about 50 percent of the price of
marijuana in stores in Alaska. He explained that anyone in
the marijuana industry, including himself as a licensee of
a vertically integrated marijuana business, would know that
marijuana could be found at bars around the city priced at
half the rate charged in stores. He maintained that the
black market in Alaska could make up as much as 40 percent
of the total market. He acknowledged that while he did not
have hard data to confirm this, he thought that anyone who
purchased marijuana would agree that the black market was
strong in Alaska. He added that anyone who owned a
marijuana business would attest that they were in direct
competition with it. He emphasized that it was well-known
that prohibition had failed, despite enforcement efforts,
and the black market remained entrenched. Both he and the
task force agreed that the only way to eliminate the black
market was through economic principles. He stated that a
three percent sales tax would ultimately generate more
revenue by encouraging more legal, tax-regulated marijuana
sales than the status quo or an increase in the tax rate
would.
Co-Chair Foster asked for confirmation that Mr. Emmett was
the chairman of the governor's task force.
Mr. Emmet responded in the affirmative.
Representative Ortiz explained that his original question
was not about the presence of a strong black market but
about whether it was gaining a larger share of the market.
He acknowledged that it would be difficult to quantify. He
also noted that the bill was brought forward with the
intention of making the legal marijuana industry more
competitive, but he wanted to ensure that the focus
remained on making the industry competitive with the black
market. He recalled the promises made by entities that
advocated for the legalization of marijuana, including the
expectation that revenue would support programs such as
rehabilitation, re-entry services, and after-school
programs. However, based on the fiscal notes, it seemed
that the promises were no longer part of the equation. He
was concerned about the cost of competing with the black
market and questioned the broader societal impact and the
potential effects on the community.
Co-Chair Edgmon acknowledged that DOR had provided
estimates, but he pointed out that the marijuana industry
had raised concerns that cultivators were paying taxes on
an honor system. The situation led to an unclear
distinction between the legal and black markets because
industry members not paying taxes could be considered part
of the black market. He mentioned that DOR had a few people
who could canvass the state, but the department was not
able to closely monitor who was paying taxes and who was
not. He emphasized that the marijuana industry was still in
its early stages, and he believed it was crucial to give it
a chance to develop. For that reason, he stated that he
would oppose the amendment.
Representative Cronk expressed concerns about businesses
going out of business due to excessive taxation. He argued
that taxing a business out of existence was
counterproductive, as it would result in no revenue being
generated. He suggested that it was better to help
businesses stay afloat and close the gap than to let the
businesses fail, noting that if a business failed, there
would be no tax revenue to collect. He concluded by saying,
you cannot tax zero."
11:35:39 PM
Representative Josephson relayed that, according to the
International Cannabis Policy Study Group, higher prices
were responsible for 27 percent of consumers turning to the
black market. He pointed out that there was evidence
suggesting that in Anchorage, an increase in alcohol taxes
led to a surprising outcome: the tax on hard liquor was
doubled, but sales grew by 41 percent, and the tax on wine
tripled, resulting in a 56 percent increase in sales. He
acknowledged that his staff had reminded him that if the
goal was to compete with the black market, which accounted
for 50 percent of sales, the bill would not be successful
at achieving its goal. He also did not think the anecdotal
scenarios would be solved by the bill. He highlighted the
fiscal impacts mentioned in the fiscal notes, including
effects on programs like CDVSA, other domestic violence
programs, vocational education programs, and recidivism
reduction efforts. He emphasized that the state budget was
interconnected with the issues. While he wanted to support
the lowest possible tax, which would be 7 percent, he still
requested the committee's support for the bill.
Representative Cronk MAINTAINED the OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Ortiz, Josephson
OPPOSED: Cronk, Galvin, Tomaszewski, Stapp, Foster, Edgmon,
Hannan, Coulombe
Co-Chair Johnson was absent from the vote.
The MOTION to adopt Amendment 3 as amended FAILED (2/8).
11:38:06 PM
Representative Josephson WITHDREW Amendment 4 (copy on
file).
11:38:35 PM
AT EASE
11:41:31 PM
RECONVENED
Representative Hannan thought that it was too late to
discuss her concerns fully but explained that she was
considering offering a similar amendment as Amendment 4.
She recalled that since her election six years ago, there
had been several issues with the marijuana industry, with
one issue standing out clearly: the challenge of cash
management. She noted that DOR had been claiming for six
years that it had workarounds in place and would
accommodate the industry by creating secure depositories;
however, despite being allocated funds last year to do so,
the department had not completed a second depository. She
explained that currently, everyone paying the tax had to
fly to Anchorage with cash in order to pay it in person.
There was only one secure depository for cash tax payments,
which she deemed an unreasonable and risky practice that
likely led to inaccurate tax collection.
Representative Hannan continued, expressing that it had
never occurred to her to put a requirement in statute for
the department to establish a secure depository in each
judicial district. She mentioned that the department might
argue that such a measure would have a huge fiscal note,
but despite receiving funds last year for the project, the
department had still not opened a second depository in
Juneau. She would consider presenting the issue as an
amendment on the floor. She acknowledged that one common
complaint on the floor was the practice of doing committee
work during floor sessions, and she was uncertain about
proceeding. She turned to Representative Josephson for his
thoughts.
Representative Josephson responded that his staff had
indicated that there were alternative ways to transfer
funds from marijuana revenue locations to a single source
without the need for flying or violating the law. He
explained that he had been instructed that no further
action was needed on the issue, and he saw no value in
offering the amendment, especially considering the fiscal
note and the fact that the state was moving in the wrong
financial direction. He added that an amendment should not
be discussed before it was officially introduced.
Co-Chair Foster asked if Representative Josephson wanted to
offer the amendment.
Representative Josephson responded in the negative.
Representative Stapp asked if the committee was finished
with amendments. He suggested that it could move forward
with the business of the committee since it was now
approaching midnight.
Co-Chair Foster agreed with Representative Stapp.
Representative Josephson stated that he was happy to offer
Amendment 4 if committee members wanted him to. [There was
not interest in hearing the amendment at the time.]
11:45:25 PM
Co-Chair Foster noted the amendment had been withdrawn and
no amendments had been adopted, which meant that there was
no need for a clean CS.
Representative Stapp MOVED to REPORT CSHB 119(L&C) out of
committee with individual recommendations and the
accompanying fiscal notes.
There being NO OBJECTION, it was so ordered.
CSHB 119(L&C) was REPORTED out of committee with seven "do
pass" recommendations, two "amend" recommendations, and one
"no recommendation" recommendation and with seven new
fiscal impact notes from the Department of Corrections,
three new fiscal impact notes from the Department of
Health, one new fiscal impact note from the Department of
Public Safety, one new fiscal impact note from the
Department of Revenue, and one previously published zero
note: FN1 (ADM).
Co-Chair Foster expected to take remaining bills up from
the schedule the following day.
11:47:24 PM
AT EASE
11:48:09 PM
RECONVENED
Co-Chair Foster noted HB 149 would be heard at the 9:00
a.m. meeting.
ADJOURNMENT
11:48:43 PM
The meeting was adjourned at 11:48 p.m.